Post Incorporation Instructions & Explanations

Below are notes and descriptions to help you complete the questions above:


Employee or Founder Stock is often received as "options" that give the employee or founder the right to buy the shares at a certain price that is usually lower than the current price.   Employee and founder shares are frequently subject to a vesting - meaning that the  employee/founder can only purchase shares that have “vested” — shares that have been earned by working with the company.  Vesting of shares means that the shareholder earns the right to buy the shares at a set price while he/she works for the company.  If he/she stops working for the company before all his/her shares have vested,  then the corporation has the option to buy the unvested shares from him/her at their original price which is usually lower than the value of the shares at that time.  


It is most common for shares to vest monthly over a period of  3 years or 4 years.  This means that an equal amount of shares will vest each month during the Vesting Period. For example, if the Vesting Period is 4 years, then 1/48th of the shares will vest each month so that all the shares will have vested by the end of the 4-year Vesting Period.    


The vesting schedule will usually include a 1-year "Cliff".  This means that none of the Vesting Shares begin vesting until 1 year after the Stock Purchase Agreement is signed (this is called the Cliff Date").  Typically, the shareholder receives a block of shares on the Cliff Date (usually 25% of his/her shares will vest on the Cliff Date) and the rest of the shares begin vesting monthly.  Some companies set the Cliff Date based on when the founder/employee started with the company or began building the product (this is usually for founders who may have been working on a product for a while before forming the company).   


Double-Trigger or Single-Trigger Acceleration:  Founders often worry about what happens to the vesting of their stock if they are fired “without cause” or if the company is acquired.  For this reason, you may choose to accelerate the vesting of the founders’ common shares to protect the founders with "single-trigger" or "double-trigger" acceleration. 

Single Trigger Acceleration

Single-Trigger Acceleration means that some or all of your unvested shares will vest immediately if there is a change of control or if you are terminated without cause.  Venture Capital funds and Angel investors do not like single-trigger acceleration for several reasons.  One reason is that they usually want to ensure that founders stay with the company, and if the founders are more likely to resign if their shares are already fully vested. VCs and Angels will sometimes agree to let a portion of the founders' stock accelerate if they are involuntarily terminated, or if they resign for a good reason.  However, most agreements do not allow acceleration if a founder voluntarily quits or is terminated for “cause.”  

Double Trigger Acceleration

Double-trigger Acceleration means that the vesting of shares accelerates only if there is both a change of control and the founder is terminated without cause within a certain number of months after the change of control.  VCs strongly prefer this form of acceleration.  

Choosing Between Single-Trigger or Double-Trigger Acceleration:

If you intend to pursue funding from VCs or Angel investors, it is usually better to choose an option that VCs and Angel investors find acceptable.  Although some investors may be open to negotiate later, many of the investors may be turned off by this. It is may be advisable to choose either:

- Single-Trigger with 25 % - 50% vesting in cases where investors agree to allow single-trigger vesting. Again, VC and Angel investors strongly prefer Double-Trigger however.

- Double-Trigger with 25% - 75% vesting is most commonly accepted by investors. You can choose 100% vesting, but this is less attractive to investors. Many companies choose 50% to balance the interests of the investors and the founders.  Companies who have already attracted a great deal of interest from investors may be successful with 75%, or even 100% in some cases


It is typical for agreements to include a 6 - 12 month Repurchase Option, which allows the company to buy the founders'/employee's unvested shares if he/she leaves the company.  This is attractive to the company in cases where the The Repurchase option enables the company to buy the unvested shares from the founder/employee at the original price instead of paying the current price which is often higher at that point in time. The Repurchase Option Period sets a time limit for when the company can choose to repurchase the unvested stock after the founder/employee leaves.  The Repurchase Option Period is typically 6-12 months long.  For example, if a founder leaves the company and he has stock options that allow him to buy the stock for a price of $0.00001 per share and if the founder has 2,000,000 shares that have not vested yet; and if the Repurchase Option Period is 12 months; then for at any time during the12 months after the founder/employee leaves, the company can choose to pay him $20.00 in exchange for his 2,000,000 unvested shares. 


An important note on 83(b) Elections:

Founders are often surprised that vesting stock is treated by the tax code as compensation, and must be recognized as income based on the value of the stock at each vesting date.  If the company grows to a high valuation, the tax bill can end up quite large, even though no gains have yet been realized.

Founders can avoid this problem by filing an 83(b) election with the IRS, which treats the stock as if it will not vest, meaning there is no tax issue upon vesting.  However, this election must be filed within 30 days of the initial stock grant.  Soloway Group PC is not a tax advisor, so we recommend that you discuss this with your tax advisor to ensure that you make the best decision based on your circumstances.  It is important that you speak with your tax advisor and make any necessary filings within 30 days of signing these documents.   If you do not have a tax advisor, please let us know and we will refer you to someone.