By Robert A. Adelson

As an engineer, marketer or senior executive, you may be offered stock or options  or a promissory note to cover part or all of your pay.

1.  Is Equity for Pay a Good Deal?  Whether you are taking a new position or re-negotiating your current job, whether you work full-time or as part-time consultant, whether the company is early stage or well established, questions often come up -

●  When does taking equity instead of cash make sense?

●  What types of equity can a company offer you?

●  How do you value the stock?

●  What taxes are paid?  How to avoid taxes?

●  When does taking a promissory note make sense?

●  What terms should a note include?

If you are an employer or starting your own company and thinking of paying stock, you ask – can we get the stock back, if things don’t work out?

2.  Valuing Stock Received.  If the stock is traded on an exchange or OTC, value is published in The Wall Street Journal.  But where the company is not public, there is no set answer on how to judge stock value. What investors paid is the best barometer but your stock remains illiquid (who knows when, if ever, you can sell) and investor stock may be different than yours.

Often, taking stock makes the most sense when you believe in the management team and marketing/business plan, or when you have other motives.  If this work gives you new contacts, or skills, or access to a new technology, the job may be worth it, even if the stock proves a bust.

3.  Stock Choices and Taxes Due. Cash investors typically receive preferred shares and service providers common.  This means if the company goes bankrupt, investors will have their money out first.  However, even with just common shares, there are often choices, e.g. between S and C stock, or qualified and non-qualified options.

Stock choices can have important tax consequences to watch out for.  If stock is issued below fair market value, that difference is taxable when the shares issue.  Options are normally not taxed until you exercise the option (and ISOs not until you sell).  Yet, obtaining stock also makes you eligible for lower capital gains tax on sale.

4.  Vesting, Dilution, Contract Protection.  When you receive stock or option documents you should also be careful to review the equity terms for such issues as -

►  When do shares “vest” – when do you own the shares? 

   When can you exercise the options?

►  What protections do you have against more shares being

   given out?  new shares diluting your share value?

►  What happens if there is a change in control of the company?

►  Do you have an ability to “cash out” your shares?

5.  Promissory Note to Evidence Payment. Taking a promissory note is an alternative to stock that makes the most sense if there is a strong sense that payment will be made after a delay. Unlike stock, the promissory note is an unconditional promise to pay a sum certain either on demand on at a fixed time.  The note should bear interest typically at the Wall Street Journal prime rate or one or more points above, can be secured or unsecured, include collection terms and might also include an equity “kicker” or stock or warrants added as part of the consideration.

The author and speaker is Robert A. Adelson, Esq., partner at the Boston law firm of Engel  & Schultz LLP.  Mr. Adelson is a graduate of Boston University, Phi Beta Kappa, and Northwestern University in Chicago, where he was a member of Law Review.  He has an advanced LL.M. degree in Taxation from New York University.

Mr. Adelson has been an attorney since 1977, specialized in business, tax and contract law.  His work includes legal issues of executive compensation, incorporation and finance, trademarks, licensing and intellectual property.  He represents startup and emerging corporations, and individual consultants and executives.  His 6-attorney law firm offers full service in litigation, family law, probate and real estate.  Engel & Schultz  is located at 265 Franklin Street in Boston.  Mr. Adelson may be reached at (617) 951-9980 ext 205 or radelson@engelschultz.com.

Copyright © 2010 Robert A. Adelson