Great question. As a founder of two startups myself, I know how the financial side of things can get pretty confusing. I’ll describe both forms of stock below, but please don’t confuse my general knowledge with legal advice.
The overwhelming majority of your authorized stock – 90-99% – should consist of common stock. Common stock owners have the ability to elect the board of directors and vote on certain aspects of corporate policy.
This class of stock is the last group to be paid – after creditors and preferred stockholders – in the event of a bankruptcy. On the other hand, common stock typically appreciates faster than preferred. As business flourishes, common stock owners are entitled to a portion of the company’s assets. In other words, they have a right to receive the appreciated value of their shares as profits increase, expanding assets and enhancing stock price value. Similarly, when the board of directors decide to pay out part of its profits in dividends, common stock owners are entitled to be paid their share.
In a privately-held startup, a common stock owner has the right to request access to corporate records. Common stock owners who believe that the company has violated their rights have the power to sue the issuing company directly as well.
Restricted Stock Units
Restricted stock units (RSUs) have a vesting period that requires the employee to satisfy certain conditions before the stock or its value is transferred (usually a period of time or dependent on work performance). Unlike stock options, there’s no purchase involved with RSUs. Instead, a certain number of units are allocated – or granted – to the employee, but there’s no value/funding until after the employee has satisfied the vesting requirements.
After vesting, RSUs are transferrable if the employee accepts the grant. Therefore, these instruments always have a value, in contrast to options that can decline in value by the time of vesting. The value of your RSUs is the closing market value of the stock price on the vesting date. That’s also the point at which your tax liability is triggered, requiring you to pay withholding and income tax on the amount received.
Because there are many considerations involved with the complexities of these transactions, you should seek personalized advice specific to your company. We help bootstrapping startups do just that at experienced startup attorneys., where we’ve connected hundreds of entrepreneurs with