Can I offer stocks to an employee before being incorporated?
We are a startup but not incorporated yet. We have someone who is interested in working part-time for equity. Is it ok to give him offer letter and offer some stocks which vests over 4 years?
Does anyone see any problems with this?
Thanks,
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Who is the proposed employee working for? What entity is paying the employer taxes? Who is paying the salary that you are proposing? – Joseph Barisonzi 12 years ago
3 Answers
My first question is "Offer for employment to work where?" In other words, without the underlying company the job offer itself is kind of suspect isn't it?
You should really think of the offer letter as a contract and without the company being established who is the offer letter even from? Normally it would be signed by an officer of the company (with their title) and therefore specifically on the behalf of the company, not someone personally.
Relative to the shares themselves, if there is no corporate entity, then how do we know how many shares is the right number? What is their presumed value, etc, etc. If this is not known, then making the offer makes no sense. If this is all figured out, then just go form the company first and do this right.....it shouldn't take more than a few days to make it all legal and legit.
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Jeff, The underline job offer is for a part-time (10hrs a week) software engineer. Are you saying it takes few days to establish a corporation? It does not matter how many shares we incorporate with, the engineer will get his x number of shares vested of 4 years. The vesting starts the time he excepted the offer even if we incorporate two years later. Of-course, it will be signed by all the co-founders. I even saw a startup that allows you to establish a virtual corporation for the same reason but can't recall their name now. – Gagan 12 years ago
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The filing of the articles of incorporation is very straight forward assuming you know how you want stuff setup. Getting the certified documents back from the state can take awhile, but there is usually a way to expedite them to get them in a matter of a couple business days if you really need them back that fast. FWIW, I've heard California can be really slow, but most other states are pretty reasonable, including Delaware which is typically considered to be the most business friendly state to be incorporated in no matter where you are physically located. – Tall Jeff 12 years ago
I think it's possible. As long as you agree upon a total percentage of the soon-to-be-incorporated company, you don't need to specify the n. of shares. In any case, definitely talk to a lawyer before drafting the letter since there might be tax consequences, employment law problems and/or actions to be taken right after incorporation.
It's not ok (and I'm the author of Foundrs.com, whose goal is to let you give equity to people before you are incorporated, so I have some background to answer the question).
You can write a letter and promise 10% of your future company. What that letter will achieve is make you liable for all kinds of trouble in the future, if your company ever takes off. For the time being, it may make the developer feel somewhat safer. So it's not a wise trade-off. Don't do it.
The real question is, why are you not incorporated? You could be very quickly if you wanted to, at least in the US. Any decent developer I know would not be shocked if I tell them that we expect to be incorporated within 2 weeks and the paperwork will be done by then. Especially since I always advise for a trial period anyway.
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Hi Alain, We are not incorporated because we just started about a month or so ago. So we want to incorporate in January and safe taxes for year of 2012 as "C" corps first year taxes are waived – Gagan 12 years ago
