Nothing so complicated. Not turning them into RSUs, simply exercising the options to buy ordinary common stock with the company's right to repurchase expiring every month (or whatever the option vesting schedule would be). Repurchase is at the purchase price paid by the employee so nobody owes any taxes.
The point is that whenever you leave you have the same number of shares either way, but this way you pay for them at par (and with 83(b) owe no tax until you sell) and get the LTCG clock started right away. If you pay when you leave you have to pay tax on the delta
This is much friendlier to the the employee, at least when the purchase price is quite low. And why wouldn't I want that for my team?
I've done this with half a dozen companies at least; I don't know why everyone doesn't. The change to the option plan is quite standard and the law firms all know it.
There is nuance, though - adversarial shareholders can bring a company down. It happens often enough with bona fide investors; but when you have a disgruntled employee (or one who quits to go work for a direct competitor), who has the same information rights as any other shareholder, but basically no skin in the game (if they exercise one share), things can get really nasty.
There are many reasonable ways to deal with it, including “right of first refusal”, some kind of custodian/escrow, FMV+x% forced sale that can be called by the company, allowing only substantial sale to 3rd party (or an employee with 2000 shares could sell one share each to 2000 different people, and all of a sudden you get regulated as a public company) etc.
I am all in favor of sharing ownership with those who shared the risk and the burden, but the governing laws weren’t written weren’t written for this, so it needs to be taken account in the specific agreements.
This is one of the most minor concern I can imagine for a startup.
>I am all in favor of sharing ownership with those who shared the risk and the burden, but the governing laws weren’t written weren’t written for this, so it needs to be taken account in the specific agreements.
These issues almost never happen and the process for giving employees equity interest is well developed. The standard SPAs always have ROFO clauses and such. There's no need to innovate -- any Vally law firm's standard docs have everything needed.
In the US shareholders of private companies have pretty limited inspection rights: basically public filings and board minutes etc (usually the latter say things like "the CEO presented the last quarter's performance and a discussion ensued"). Preferred investors negotiate more detailed inspection rights.
In 30+ years of running startups in the Bay Area I have never seen any of the things you describe happen (not just my own companies -- never seen them happen). OTOH, at the second company sold (first one I founded) the front desk receptionist made enough to pay off her mortgage and fully fund her retirement. That's the way things should work.
It was not in the US - it was in a country where shareholders in private companies actually have rights - and I was contracting for a company where this was actually used for good: founders tried to screw early employees (already vested and exercised) out of some rights through a restructuring (that was essential for business reasons) - and the employees managed to level the playing field using such an approach. It was good for everyone.
But it could also have been used by a single vengeful employee to effectively stop or delay that restructuring, which would have been bad for everyone.
All I said was that there was nuance. A good lawyer in the relevant jurisdiction would know what it is.
The point is that whenever you leave you have the same number of shares either way, but this way you pay for them at par (and with 83(b) owe no tax until you sell) and get the LTCG clock started right away. If you pay when you leave you have to pay tax on the delta
This is much friendlier to the the employee, at least when the purchase price is quite low. And why wouldn't I want that for my team?
I've done this with half a dozen companies at least; I don't know why everyone doesn't. The change to the option plan is quite standard and the law firms all know it.