What Startup Founders Must Know About Compensation

The Tough Questions Answered Here

Photo by Vitaly Taranov on Unsplash

It’s also very different for each stage of a startup’s life cycle and type of company.

Here are some key things that founders should know about the various types of startup equity compensation.

The tax consequences of stock compensation are so complex that many CEOs and CFOs mistakenly believe that they are tax-free.

This can lead to unnecessary taxes being paid by the recipient when exercising options and even more taxes being paid by the company when issuing equity grants to compensate executives.

This is because venture capitalists and investors view startup equity compensation as “Founder Monies” — money that entrepreneurs could invest or otherwise use for personal benefits if they didn’t take equity instead.

This high pressure to accept whatever compensation is offered can lead to founders feeling like they have no choice but to negotiate from a position of weakness, even if their requests are reasonable.

This culture of accepting the first offer without negotiation can lead to founders making decisions they may later regret.

What Startup Founders should know about Liquidity Events and Taxes on Startup Equity Compensation

  1. how much will be paid out due to tax withholding;
  2. how much will need be set aside as a liability (deferred income);
  3. how much will need be set aside as a liability (deferred income) by employees;
  4. what kind of documents do we need from employees?
  5. how do we minimize our own tax liability?
  6. how do we minimize our tax liability for employees?
  7. What is my marginal tax rate?
  8. Do I have other sources of capital gains/losses (bonds)?
  9. How do I account for this exit in my personal financial planning? and
  10. What do we do with the remaining stock after the tax liabilities are paid?

Founder of Cudy Technologies (www.cudy.co), a full-stack EdTech startup helping teachers and students teach and learn better. I am also a mentor and investor.