Equity Ops
Founder share purchase
Technical founders (CTOs) who are hired before the company is incorporated are offered common shares. We recommend purchasing common shares for a nominal amount instead of receiving options. However, this is dependent on each founder’s personal tax situation.
When a company issues common stock, it sells ownership stakes in the company differently than it would to investors. The price of purchasing common stock is nominal for the company’s founders but may change over time with employees (see 409A Valuation).
Please consult with tax advisors. It is strongly advised for founders to seek tax counsel from professionals who are experts in working with founder equity in venture-backed startups.
Stock options
Equity 101
Common shares are usually reserved for founders, employees, and other stakeholders.
Options give the holder the right to buy common stock at a specified price for a certain period of time and may be used as a form of compensation for employees and advisors. Though options are a right to buy common stock, they are not the same as actual shares of stock.
Stock options are a form of equity compensation in which an employee is granted the right to purchase a certain number of shares in the company at a predetermined price (i.e. strike price). These options usually vest over time, meaning that the employee can only exercise their right to purchase the shares after a certain period of time has passed.
Stock options are issued in two ways:
Incentive Stock Options (ISOs): Tax-advantaged (no immediate tax at exercise, capital gains later) rights to buy shares generally reserved for employees.
Non-Qualified Stock Options (NSOs): Rights to buy shares granted to non-U.S. employees and are taxed as ordinary income upon exercise.
Though options are a right to buy company stock, they are not the same as actual shares of stock.
Strike price
All option grants come with a strike price or exercise price based on the fair market value of the company’s common stock on the date of the grant. In private companies, the strike price or fair market value (FMV), is determined by the company’s board of directors, often based on a third-party valuation report known as a 409A valuation. It is important to issue options at the prevailing fair market value to avoid negative tax consequences for the employees.
The strike price represents the price or an amount the employees need to pay in order to exercise their options. For example, if an employee has 100 vested options with a strike price of $1.00/share, they would need to pay the company $100 in order to convert their options into common shares in the business.
Vesting
Standard time-based vesting schedule for employees is four years with a one year cliff. Founders will vest over a four-year period with a six month cliff.
Vesting types
Time-based vesting Equity granted will vest over time to ensure that employees and founders who leave the company early do not receive the entire equity amount associated with the total issued. Vesting schedules often include a cliff which is a required minimum amount of time for vesting.
Performance-based vesting Performance-based vesting ties equity grants to the achievement of specific goals or milestones, rather than the passage of time. While this can motivate employees to hit key targets, it is more complex to design, administer, and evaluate than time-based vesting, requiring significantly more resources to set criteria, measure progress, and ensure compliance with accounting and tax regulations. Performance-based vesting is generally more appropriate for the executive team than the entire company. It is not recommended for employees.
Time-based vesting example
An employee has been granted 1% of the fully diluted equity of the company as options with a four year vesting period and a one year cliff.
If their employment comes to an end at 6 months time, that employee would not have vested 1/8th of the total amount of options granted because they would not have reached the cliff of 1 year (which would mean a minimum of 1/4 of the options vests).
This employee would vest 3/4 of their options at their third year of employment and be fully vested at their fourth year of employment.
Accelerated vesting
OCV companies’ standard stock plans do not allow for accelerated vesting for employees.
Double-trigger acceleration is an option for new founder shares issued to CEOs and CTOs only. Standard industry terms for double-trigger acceleration are included in founder offer letters and OCV does not expect to negotiate these on an individual basis. The Board must approve any vesting acceleration.
Types of acceleration schemes for Executive hires
Double-trigger acceleration: All or a portion of unvested shares accelerate in the event of (i) change of control (M&A scenario) and (ii) termination without cause or resignation for good reason (i.e. the executive is laid off without cause or if they resign because of material reduction in salary, relocation of office, etc.). This means that the executive’s unvested shares accelerate in full when both (i) and (ii) occur, usually within 12 months. This is common and of no harm to the company.
Single-trigger acceleration upon a change of control: Executive’s unvested shares accelerate in the event of a change of control. This is not commonly seen in offer letters and may raise concerns in future rounds.
Single-trigger acceleration for termination/resignation: Executive’s unvested shares accelerate in the event they are terminated without cause or resign for good reason. This is akin to a severance-type arrangement, where if the executive’s service terminates, they get a portion of their unvested shares accelerated. This is also uncommon in offer letters, and not recommended unless there’s a compelling reason to do so.
At the advice of counsel, OCV companies will not consider accelerated vesting requests for non-founder shares during the pre-Seed stage as these may jeopardize an M&A transaction. Standard industry practice is for the board to decide for all employees at the time of a sale (i.e. cancel, substitute, accelerate, etc.).
This change does not affect previously issued founder shares. Founders joined prior to May 2025 may revisit double-trigger acceleration at the Seed round.
When early stage companies allow for this type of acceleration, it is normally 3-6 months of vesting acceleration at most. Vesting should not accelerate in an IPO. Shares would continue to vest as they did prior to public filing.
Exercise of vested options
After the first anniversary (i.e. 1-year cliff), option holders may receive a notification from the CapTable Management Platform to exercise their vested options.
Employees are free to exercise their vested options at any time, unless the company is actively engaged in a financing round. In which case, we encourage employees to wait until after the round closes and the new 409A valuation report (establishes the latest fair market value) is available to exercise their options.
The decision to exercise or not depends on an individual’s personal tax situation and planning. Best practice is for employees to speak with their own tax advisor to understand the tax impact before electing to exercise vested options. Additionally, OCV looks to each company to set their own policies around employee option exercises.
Early exercise
Early exercise gives employees the option to purchase shares of company stock at the exercise price, which is typically set at the fair market value of the stock at the time the option is granted. However, because the company is private and the stock is not publicly traded, the employee cannot sell the shares on the open market to realize their value.
OCV companies’ standard stock plans allow for early exercise subject to Board approval. Early exercise requests are evaluated on a case by case basis (depending on local regulations and expenses considerations, etc.). The Board will only approve early exercise for options issued to founders (typically CEO and CTOs) at pre-Seed due to stock plan administration costs and materiality and risk profile. Please discuss with The Legal Team on appropriate steps.
The Legal Team prefers to run early exercises directly (i.e. not in the CapTable Management Platform). Early exercise should be accompanied by an individual’s 83b election.
Early exercise can have tax implications for employees. By exercising early, employees may be able to minimize their tax liability by initiating the capital gains holding period sooner. However, they may also incur tax liabilities associated with the spread between the exercise price and the fair market value of the stock at the time of exercise.
Option grants & capitalization table management
Capitalization tables are managed by the Legal Team.
New grants
OCV recommends a quarterly or semi annual batched process to minimize legal costs and administrative time spent on option grants.
To issue new grants, Founders need to compile new hire offer letters and required information listed this tracker ([Company], Q[X] - Options Grants ), and provide these to the Legal Team quarterly or semi-annually.
From the company’s EOR, Founders should be able to locate employee titles, email addresses, classification, and confirm employee start dates (and end dates where applicable). Equity amounts, vesting schedules, and a sign off date from the board can be found in the company’s ATS and human resources documentation.
It is the company management’s responsibility to review and confirm new hire start date, which is the vesting start date.
Employee terminations and departures
As part of an employee’s offboarding process, Founders need to notify the legal team the last day of employment to properly account for options vesting. This should be done as soon as possible instead of a batched process.
Option grant agreement forms
The Legal Team provides and drafts option grant agreement forms. Following the approval by the company’s Board of options grants agreements, they will be released into the company’s capitalization management tool.
Locally compliant option grant templates are available for the following countries:
Argentina
Australia
Brazil
Canada
Colombia
Czech Republic
Denmark
Germany
India
Ireland
Italy
Japan
Mexico
Netherlands
New Zealand
Portugal
Sinapore
South Korea
Spain
UAE
Ukraine
United States
Template language is preferred in most non-US countries where applicable and the above list of templates will be confirmed and updated prior to new options issuance.
Template language is periodically reviewed by local counsel, but because our US-based Legal Team is not licensed in all relevant jurisdiction(s), they cannot guarantee that those templates satisfy all the requirements of the relevant jurisdiction(s), which may pose some enforceability, tax, or other risks to the company. A disclaimer will accompany such templates, reflecting those limitations.
For other countries where the Legal Team is not licensed, local counsel licensed in those relevant jurisdiction(s) will prepare options grants and provide legal advice specific to the proposed options. Engaging with local council will provide companies with as much assurance as possible that the grants intended for issuance are enforceable, have no unforeseen tax or other consequences for the recipients, and satisfy the relevant requirements in those jurisdictions. The legal team will assist with engaging local counsel for that purpose and with negotiating the fees associated with their review.
Local counsel review for option grants will cost between $3,000 to $5,000 per instance.
Refresh grants
The main purpose of refresh grants is to ensure that employees have ongoing incentives to stay with the company and help it grow. As the initial grants vest or expire, employees may lose some of their motivation and ownership in the company. Refresh grants help mitigate this by providing a new set of equity awards.
Refresh grants typically refer to the practice of issuing additional stock options or equity awards to employees or team members over time. These grants are meant to "refresh" or replenish the equity incentives that employees receive after their initial grants have vested or expired.
Refresh grants are a common tool used by startups to retain and motivate employees, especially in competitive job markets where attracting and retaining top talent is crucial.
As a default, the initial options pool established at an OCV company launch do not include refresh grant allocations. Most new hire grants would not have surpassed 50% vesting prior to Seed round because the timeline from founding to Seed round is typically <18 months.
Founders should consider employee retention and refresh grant allocation in determining options pool size as part of the Seed (and any future financing) round.
Post-external funding refresh grans
Include refresh grant allocation in options pool proposal as part of the upcoming financing round (this is your budget in building out the refresh equity program). Create standard guidelines for administering refresh grants that meet the company’s goals and objectives. Refresh grants are also subject to a standard vesting schedule.
The timing and criteria for refresh grants can vary widely from one startup to another. They are typically based on factors such as,
Performance
Tenure
Company valuation or funding rounds
For example, a refresh grant might be issued every year or two to employees who have performed well and are seen as key contributors to the company's success.
409A Valuation
A 409A valuation is used to determine the fair market value of a private company's common stock, often for the purpose of setting the strike price for employee stock option grants. A proper 409A valuation by a professional (individual practitioner or firm) provides safe harbor for the company under IRS tax code section 409A, which regulates the taxation of non-qualified deferred compensation plans.
409A valuations are important because they ensure that the strike price for stock options is not set below their fair market value. If the strike price is deemed below fair market value, employees and companies may face negative tax consequences, including penalties.
409A Valuation methodologies and inputs
The valuation process takes into account a variety of factors, including the company’s financial performance, industry trends, comparable transactions, and the rights and preferences of different classes stock.
The third-party, independent, valuation team often derive an overall company value based on market and company-specific inputs, then allocate that total value to a common per share value conclusion. For early stage, pre-revenue companies, the latest round of financing is often considered the best indication of value.
Note that employee options are generally for a company’s common shares. Since VC investors typically receive preferred stock, which comes with additional rights and preferences compared to common stock, price paid per preferred share is often much higher than a common per share (after discount for lack of marketability) for 409A purposes.
409A Valuation cadence
409A valuations need to be refreshed at least once a year or when there are significant changes that impact the value of the business. For early stage companies, receiving new term terms / closing a new financing round would trigger a 409A update.
OCV companies will have a board determined FMV at 2x par value as of the company launch date. Absent of a new funding or other material event in the first 12 months, the company will perform a 409A valuation as of its first anniversary date.
Valuation provider
OCV companies’ CapTable management platform also provides 409A valuation services as part of their annual subscription.
Request a 409A valuation report
Log into the company’s CapTable Management System
Find “Compliance & Tax” in the navigation bar and select “409A valuations”
Find the appropriate launch button to get started and follow input screens instructions to provide requested data
The Company’s Finance & Accounting Team is available to help with this process at their standard billable rate
Typical turnaround time for a draft valuation report is 1-2 weeks. Once draft is available, Management team will review (OCV, Company’s Finance or Team, is available to support a quick reasonableness check), accept as final or request changes. Prior to a meaningful revenue base and before receiving any external indication of value (i.e. a term sheet), 409A value (or common price per share) is expected to be negligible as the business faces significant uncertainty and funding risk.
Management should send a copy of the final 409A report to the company’s Legal Team and provide direction on board consent timing. 409A value sign off is part of the routine board consent process for new option grants. When providing timing direction, management should consider whether upcoming grants, fundraising, or other material events may affect the timing of board approval.
It’s worthwhile noting that the 409A valuation has a specific use case. Generally speaking, the overall company value estimate from 409As would differ from pre-money valuations used in the context of startup financing.
Qualified Small Business Stock (QSBS)
Qualified Small Business Stock (QSBS), defined under Section 1202 of the U.S. Internal Revenue Code, is stock issued by eligible small businesses that provides significant tax benefits to investors. Qualified stockholders can exclude up to 100% of capital gains from federal taxes when selling their shares, provided they meet certain conditions. Maintaining detailed records of QSBS status is essential to ensure compliance and maximize tax benefits when a material event occurs.
QSBS compliance matters to all stockholders, including founders, because:
Tax Savings on Capital Gains: Founders holding significant equity may exclude up to 100% of capital gains from federal taxes upon a liquidity event, subject to caps under Section 1202.
Increased Attractiveness to Investors: QSBS compliance makes the company more appealing to current and future investors due to potential tax advantages.
Encourages Long-Term Growth: The five-year holding period requirement aligns all stakeholders toward long-term success rather than short-term gains.
QSBS Criteria
For a company to be considered QSB, the company must be a U.S. C corporation, engage in a "qualified trade or business" and have aggregate gross assets of less than $50,000,000. Additionally, a QSB must use at least 80% of its assets to conduct one or more "qualified trade or business" activities. The holder must hold the QSBS for more than five years at the time of sale.
Disqualifying redemption
If the company conducts a disqualifying redemption from investors or any stockholders, the company may lose QSB status for up to 2 years.
A disqualifying redemption happens when a company buys back its own stock in a manner that violates QSBS rules. This can disqualify the stock from QSBS tax benefits. Redemptions become disqualifying when they occur within 1 year before or after the stock is issued and exceed 5% of the company's total stock value.Repurchase of shares related to employee termination is not a QSBS disqualifying redemption.
Documenting QSBS status for post-Seed Companies
OCV retains the right to request information periodically to document QSBS status for companies it has helped to launch through Series A raises. OCV does not produce any formal memo or evaluation of QSBS status with this information and only requires updated documentation to be supplied at the time of any material events that might impact QSBS (i.e. any new funding rounds). Companies who are fundraising or post-seed may consider using Carta’s service to monitor and create attestation documentation to provide investors (including OCV) for this purpose.
Investor right to information
Under the covenant agreement outlined in investment terms, post-seed companies are required to provide ongoing information to document status with QSBS provisions. This right may appear differently depending on the term sheet format signed. For example:
Specific QSBS Provisions: Some term sheets may explicitly outline provisions requiring commercially reasonable efforts to maintain QSBS status and periodic reporting obligations.
General Investor Rights: In other cases, term sheets may include broader provisions granting major investors (e.g., those who meet a specified investment threshold) general information rights, inspection rights, first refusal rights, co-sale rights, and pre-emptive rights. These rights may implicitly or explicitly include the ability to request information related to QSBS compliance.
Regardless of the language, the right to request information ensures that transparency is maintained and compliance with QSBS regulations is documented effectively. The specific provisions governing these rights should be reviewed in your company’s signed term sheet and investment agreements.
QSBS Attestation
OCV portfolio companies are eligible for a discounted rate on Carta’s QSBS (Qualified Small Business Stock) subscription add-on (renewed annually). We recommend this service for companies that are fundraising or post-seed stage.
The QSBS add-on helps ensure your company and its investors can fully leverage potential tax exemptions under Section 1202. It reduces administrative burden by handling ongoing QSBS eligibility tracking and produces formal attestation documentation that can be shared with investors during diligence, secondary transactions, or an eventual exit. This adds legal clarity and strengthens credibility with stakeholders without requiring extra lift from the founding team.
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