Legal Q: I need a contract for equities (start up business)

[ModelVillage]

I need to set up a proper contract with the startup I am involved in. Any input would be very appreciated.

I have been offered "x% of the equities" of this start-up for work I am doing for them. By this wording I assumed these are straightforward equities, the word "options" was not mentioned. (Is there a difference anyway?)

Also I have only an email confirming the agreement as I was told that there is "no need for a stakeholders agreement since the startup is not incorporated yet." Does stakeholder mean my equities are "real" equities, and not options?

These equities will be vested over "maybe 2-3 years".

I want a real contract with a real signature on it, so what does it need to entail? The percentage, the vesting period, whether those are equities or "stock options", my duties, who issues this to whom, have I forgotten anything?

Many thanks

If the company is not yet incorporated then it doesn't have any shares yet.

Options are different to shares because you do not actually hold shares at the time of option grant. Usually options give you the right to buy shares over time at a set price. This price may be par value or may be some other price related to the business value at the time. HMRC usually signs off the price of employee options as employees have certain tax advantages which non-employee option holders do not.

Options are non-voting until they are exercised and many employees only exercise them on the point of eg a sale (meaning they buy at their option price of £1, say, and sell 1 minute later at £2, say, so they never actually have to find the money). Vesting means that you need to stay with the company throughout the vesting period or some options will be taken away.

If the start up is not yet incorporated, who would your contract be with?

Are you going to be an employee?

Thanks for that input!

The "contract" is an email with the woman setting up the business. She has since elaborated more on this (written in an email):

"My work - x% share of the company, vested over a period of possibly 2-3 years.

There will be dilution (the same rate for all employees) if we get funded. This will need to be written down in the form of a proper contract and stakeholder agreement, once we incorporate the company. Incorporation will only happen when we have a product to launch."

I would be employed by the founder if all goes to plan.

If I print and get that email signed would that be enough of a contract?

Many thanks

Will you work for the company more than 25 hours out of your working week? (Or a similar proportion if you are a part time worker).

Why doesn't she want to incorporate the company now? It's inexpensive.

Yes, I will work full time on this, but that'll only happen when they get funding. Inc will only happen just before launch, when there's a product. Makes sense to me since investors might question why it takes a few months to come up with this product.

What irks me is that my percentage (say it is 5 percent) vests over 5 years, so every year I'd get 1 percent... So I'd have to work there for that time. Just thinking what if we don't get on etc, they want to boot me out etc. Five years is a long time trying to hold onto a job in this situation.. Also, This would mean that others who might get only 2 percent already get their share after 2 years. Is this the done thing?

Mind you, the group working on this is quite big and only one other has asked for at least an email confirmation of the arrangement.

Actually, at first she said that vesting will be 2 or 3 years, and now (when I asked about a more detailed job definition ) she tied the vesting to my percentage... Like I said 5% vests over 5 years.

She doesn't have to vest a percentage at a time, she could vest the 2% people in the same proportion as you.

Are you getting paid at all for the product development period?

Remember, this is a negotiation, she needs you too, you don't have to accept her terms and sounds like she is feeling her way too (does she have a lawyer or accountant advising her?)

OP are you in London? Casa business school host a free meet up for entrepreneurs seeking legal advice, it is run by students from the law school but supervised by their tutors. I will PM you details if interested.

Cass not casa

Business - thanks! I will enquire if everyone gets vested proportionally. It would bother me if there are different rules for different people... also if I only get a percentage point per year, then my package is actually less attractive than someone getting only say 1percent straight away...

There is no pay at the moment, but obviously will be when/if there is funding. So the incentive is just the possibility of shares at the end... Can't believe everyone just went on board without even staking out the agreement.

Tiger - YES!! That would be awesome. Thank you :-)