The Startup Lawyer By Eric Koester 1 Cooley, Godward, Kronish, LLP Seattle, Washington

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1 The Startup Lawyer By Eric Kester 1 Cley, Gdward, Krnish, LLP Seattle, Washingtn My Blg: DIVIDING UP THE PIE: 2 DEALING WITH INITIAL CAPITALIZATION ISSUES FOR A STARTUP COMPANY Dn't gamble; take all yur savings and buy sme gd stck and hld it till it ges up, then sell it. If it dn't g up, dn't buy it. Will Rgers Scial Cmmentatr and Humrist Hw t divvy up the cmpany s equity is ften, understandably, ne f the first things a cmpany funder thinks abut fr the new business. Sme funders are cncerned abut liquidity; thers want t ensure they keep the largest piece f wnership as they build the next Ggle r Genentech; still thers are fcused n cntrl f the business. The reality is, wnership f the business is why many entrepreneurs jin r frm a startup, and ensuring that this wnership is wellthught ut is crucial fr a new business. As a startup lawyer, yu may find yurself as an intermediary between the cmpany s funders helping the team mediate the sticky questins f dividing funder s equity, cming up with vesting terms n equity, allcating equity t emplyees, and putting in place decisin-making prtcl. At the beginning, a startup lawyer s invlvement is an pprtunity t ensure that structures are put in place that lay the fundatin fr a stable but flexible capitalizatin structure. While sme f these chices seem like nthing mre than business decisins the truth is the funders will ften turn t (r need t turn t) their lawyer t help figure ut t divide up the pie. In this article, we will discuss (i) allcating funder wnership identifying wh is a funder, hw t prtect the funders in the event f a departure r terminatin, and hw t plan fr future investrs r emplyees, (ii) 83(b) electins the imprtance f understanding when key tax benefits can be lst and hw t put prcedures in place t prtect yur clients, and (iii) cmmn emplyee incentive plans including ptins, restricted stck, bnuses, and thers, and hw each f them fit tgether t prvide a flexible capital structure. 1 Eric Kester is an attrney in the Seattle ffice f Cley Gdward Krnish LLP. His practice is fcused n advising startup and emerging cmpanies, particularly in the fields f infrmatin technlgy, life sciences, and clean technlgies. Eric s blg can be fund at and he can be reached at ekester@cley.cm. 2 Prtins f this article are frm What Every Engineer Shuld Knw Abut Starting a High-Tech Business Venture by Eric Kester, published in January 2009 by CRC Press.

2 FOUNDER ALLOCATIONS As the ppular phrase ges 50% f nuthin is nuthin. But what gets mre interesting (and why funders care, frankly) is the ptential fr 50% f smethin. And that s why a startup s funder team needs t cnsider its initial equity allcatins early in its frmatin. When a funder team is ready t mve frward with their business and issue wnership in their cmpany, the first step is t discuss the equity allcatins as between the funders. Rather than think abut wnership in the abstract, a helpful first step is t prepare an initial capitalizatin mdel (a sample is included as Exhibit A). Fr sme funders wh have a detailed fundraising plan fr the future als encurage them t lk ut further and identify likely funding events and hw this culd affect the capitalizatin structure tday and tmrrw. As a startup lawyer helping yur client t set ut their capitalizatin table and wnership allcatins, there are a number f key questins yu shuld ask t help the team: 1. Are all f these peple really funders? A funder r funder team smetimes includes a much bigger set f peple in its definitin f funders smetimes because f the mutual excitement, smetimes they feel bad abut excluding peple r ther times because they haven t identified exactly why it matters. Many funders rund up an initial management team and identify them all as funders, when in reality sme f them wuld be better classified as rank-and-file emplyees r service prviders. This distinctin can be imprtant, especially when ne cnsiders that funders and their funders stck usually enjy unique status relative t ptinees, investrs and ther sharehlders. Fr example, funders stck is ften (a) vting stck (versus ptins, which are nt able t be vted until exercised), (b) included as a registrable security alngside the preferred stck in a public ffering, and (c) subject t vesting and transfer restrictins that are designed t retain the funder s services t the cmpany (and are a reflectin f the funder s imprtance t the cmpany s success). In additin, future investrs may impse mre restrictins n funders rather than ther cmpany emplyees. As cunsel t these cmpanies, lawyers shuld encurage clients t limit the granting f funder status t nly thse peple wh are bringing significant value (in the frm f assets, IP r unique expertise) t the cmpany. The rest f the team can be incentivized in ther ways, including thrugh ptin grants. 2. D yu want t reserve shares fr emplyees and cntractrs under a stck ptin plan? Particularly in the case f high-tech businesses r in sme high-tech markets, emplyees (especially the gd nes) will expect sme cmpnent f equity cmpensatin built int their emplyment package. This smetimes means yu can use additinal equity in exchange fr a lwer starting salary, r as a way t lure a high-value hire frm a large cmpany. As a result, thinking ahead abut equity fr future hires is an imprtant cnsideratin. 2

3 Many funders believe this is a decisin that can be deferred until later, but building an equity incentive plan reserve int the mdel early n can help the funders be practive in their equity strategy. Als, many cash-strapped start-ups want t use equity in lieu f salary early n (this has its wn issues which are nt addressed here), but als want t be very careful and stingy with issued equity s as t avid piecemeal dilutin a stck ptin plan can be an effective way t accmplish this while impsing sme equity discipline n management. Later, yu ll find a summary f the varius equity and nn-equity incentive plans is belw. In Exhibit A, yu ll ntice that the cmpany has set aside a prtin f its equity fr its stck ptin plan. 3. D yu want vesting impsed n yur stck? The discussin f vesting is smetimes difficult particularly if a team has just frmed and remains full f ptimism. (In many cases, the startup lawyer is uniquely psitined t address present these questins t the team pssibly aviding any bruised egs r hurt feelings.) In mst cases, n ne wants t think abut the all-t-real pssibility that the grup might nt make it thrugh t the IPO with a cuple defectins, terminatins, r departures. But the reality is that very few startup funder teams make it thrugh the early stages withut a shakeup. S putting in place prtectins a key ne being vesting n funder s stck isn t smething t verlk Clearly, funders wuld prefer t wn their stck utright; hwever, there are many reasns t chse t impse vesting n their shares. Fr example, when there is mre than ne funder, the chice is ften made t impse vesting as a shw f cmmitment t the cmpany as between the funders. Additinally, new cmpanies that expect t raise venture capital ften chse t impse vesting because they anticipate that such vesting will be a cnditin t the venture fund s investment in the cmpany. The table belw ffers sme additinal infrmatin n cmmn structures fr vesting n funder s stck r emplyee equity. 4. What is yur equity strategy fr investrs? While decisins arund future funding culd again be deferred, laying ut the nging needs fr capital are very imprtant fr the startup lawyer t be able t cunsel n matters frm future equity t entity type. As a result, having an early understanding f such financing s effect n the funders wnership can be imprtant in determining allcatins initially. Many funders are surprised when their attrney, accuntant r ther advisr shws a detailed calculatin identifying the impact f dilutin n a funder s share f the cmpany. While it may seem bvius t sme, the effect n a funder s shares is smetimes nt clearly understd and helping a funder t identify hw future financing culd affect the cmpany is paramunt. Types f Vesting There are numerus ways t structure vesting restrictins n funders stck, including the use f time-based vesting, milestne-based vesting, and a cmbinatin apprach. Time-Based (Straight Line). Stck is released frm vesting in equal amunts each mnth ver a 3

4 particular time perid (say mnthly, quarterly r annually ver a number f years, usually between tw and five years). As an example, a funder has straight mnthly vesting ver a three year perid. After being emplyed fr twelve mnths, the funder leaves the cmpany. At this pint, the departed funder wuld nly wn ne-third f the riginal stck issued t him r her. The rest f his r her shares (2/3rds f the riginal amunt issued) wuld then be repurchased by the cmpany at the par value. Time-Based (Cliff). N vesting fr a particular time perid (fr instance, the first six mnths r first year r until financing ccurs). Then, nce that initial perid is cmpleted, the cmpany will then release a certain prtin frm vesting. Once the cliff perid has passed, the rest will typically vest n a straight line basis afterwards (mnthly, quarterly r annually). As an example, a funder s stck is vested ver three years. The vesting will be a ne year (twelve mnth) cliff, fllwed by straight line mnthly vesting ver the remaining tw years. If the funder departs after six mnths, he r she will have n shares vested and the cmpany will repurchase the entire amunt f riginal shares issued. Hwever, if the funder departs after eighteen mnths, then ne-third will have vested after the cliff and six mre mnths f vesting wuld have ccurred. S the funder wuld have fifty percent f his r her stck vested at that time. Milestne-Based Stck will be released upn the achievement f particular milestnes, rather than based n time perids. As an example, a certain prtin f unvested stck will be released frm vesting when (1) the cmpany receives at least $1 millin in funding (t incentivize fundraising effrts), (2) the cmpany reaches $250,000 in annual revenue (t incentivize sales), and (3) when the cmpany releases its secnd generatin prduct (t incentivize prduct develpment). A Cmbinatin-Based Apprach Stck will be released n a cmbinatin f milestne-based and timebased vesting. As an example, half f the stck will vest mnthly ver a three year perid and the ther half will vest based n achievement f certain milestnes. 83(b) ELECTIONS Vesting n stck has ther cnsequences than just restricting a funder s ability t wn the stck utright. The decisin t apply vesting n funder s stck als has imprtant federal and state incme tax cnsequences which bth the cmpany and the funder need t cnsider carefully and take int accunt in their respective tax planning. These incme tax cnsequences arise principally frm a prvisin f the typical funder s stck purchase agreement which entitles the cmpany t 4

5 repurchase the shares f stck sld under the agreement at the riginal purchase price if the funder terminates his emplyment r a cnsulting relatinship with the cmpany prir t vesting f thse shares. Imprper r ill-cnsidered handling f 83(b) issues is ne f the few things in the emerging cmpany practice that cannt be easily fixed; therefre, keep clse tabs n the 83(b) decisin making prcess, and any filings and their timing, t avid unintended cnsequences. The Missed 83(b) Electin What culd happen... Yu issued stck t the funders subject t vesting terms, but yu frgt t file 83(b) electin. If a funder is issued stck and the stck is subject t a substantial risk f frfeiture (per the IRS rules), then the stck purchase isn t cmplete until this risk f frfeiture is gne. Once the funders stck has vested, the risk is deemed t be gne and the IRS judges the stck purchase t be cmplete. At this pint, accrding t the IRS, the difference between the riginal price yu paid (let s say $0.01 per share) and tday s fair market value after the vesting has run (let s say $10.00 per share) is subject t taxatin. This difference ($9.99 per share) wuld be taxed as rdinary incme. By filing a timely 83(b) electin, yu are able t avid this prblem. When yu sell this stck at a later date (after it has appreciated greatly), the appreciatin wuld be taxed as rdinary incme at almst twice the rate if yu d filed the 83(b) electin and the gain was taxed as lng-term capital gains! In ur example, yu d nly pay lng-term capital gains rates n the $9.99 per share gain. Watch ut fr... In the cmpany s early stages, it is easy t miss 83(b) electin filings with the IRS s make sure that this respnsibility is delegated t smene. A 83(b) electin must be filed n later than 30 days fllwing the transfer f prperty. (Incme Tax Regs (b)). When yu issue stck t funders (subject t vesting), make sure this filing is made. Nte: If a startup allws early exercise f ptins (which is ftentimes dne fr the advantageus tax treatment), yu als will need t file timely 83(b) electins in this case. TIP: File timely 83(b) electins fr vested stck. Federal and mst state incme tax laws generally prvide that a transfer f stck r ther prperty t an emplyee, cnsultant r ther prvider f services t the transferr results in recgnitin f taxable cmpensatin incme by the transferee in the amunt f the excess f the fair market value f the prperty ver the amunt paid fr it. Therefre, the funder will recgnize such incme n the purchase f stck under the agreement t the extent that the fair market value f the stck exceeds its purchase price. The amunt and timing f such incme recgnitin will 5

6 depend n whether r nt the funder makes a special electin, referred t as a Sectin 83(b) electin, in cnnectin with the purchase f the stck. As the startup lawyer, this decisin t file r nt t file the 83(b) electin seems like it shuld be the respnsibility f the individual. But the reality is few funders understand the impact f a missed filing r knw what they need t d. Therefre, the respnsibility usually falls t the lawyer fr the startup and a missed electin filing isn t a bell yu can unring. ESTABLISHING AND USING STOCK/INCENTIVE PLANS (AND ALTERNATIVES) Fr many entrepreneurs and early emplyees f startup cmpanies, ne f the main reasns they jin the venture is the lure f receiving stck r ptins t purchase stck that may ne day skyrcket in value. Stck grants and stck ptins represent imprtant tls t attract and mtivate talented emplyees. Managing equity cmpensatin is a cmplex issue t juggle fr mst entrepreneurs, and ftentimes becmes the respnsibility f the lawyer fr the startup. The mst cmmn frms f equity incentives fr the emplyees f yung, grwing cmpanies are: Stck ptin plans; Stck grants; and Stck purchase plans. Equity Vehicles Life Sciences Nne, 8% Stck and Optins, 7% Bth Optins, 11% Only Cmmn Stck, 1% Only Incentive Stck Optins, 63% Only Restricted Stck, 3% Only Nn- Qualified Stck Optins, 8% Surce: 2006 Cmpensatin & Entrepreneurship Reprt ( 6

7 Equity Vehicles Infrmatin Technlgy Nne, 5% Stck and Optins, 8% Bth Optins, 3% Only Cmmn Stck, 4% Only Incentive Stck Optins, 62% Only Restricted Stck, 5% Only Nn- Qualified Stck Optins, 13% Surce: 2006 Cmpensatin & Entrepreneurship Reprt ( As yu can see frm the charts abve, cmpanies utilize a variety f different prgrams t prvide incentives t their emplyees, but may rely mre heavily n ne type f plan ver the thers at varius pints in the cmpany s grwth. In particular fr technlgy cmpanies, ne f the primary recruiting and retentin tls is the chance fr emplyees t becme wners f the cmpany thrugh participatin in an equity cmpensatin plan. As discussed previusly, budgeting fr equity t be assigned t certain new hires is a helpful and imprtant prcess. Mdeling such a plan int the capitalizatin structure early will allw the funders t see these plans effect n their wnership percentages and will prvide them with a pwerful, flexible recruiting and retentin tl. Hwever, there are als alternatives t such equity-based plans. Hw des a Stck Optin Wrk? Startup, Inc. grants ne f its emplyees an ptin t purchase 100 shares f stck f the cmpany. Startup believes its stck is currently wrth $1.00 per share. Therefre, Startup sets the exercise price r strike price at $1.00 per share. This means the emplyee may give the cmpany $ and will receive 100 shares, but Startup desn t ask fr the mney nw. The stck ptin can be exercised fr 10 years. Therefre, the emplyee desn t have t exercise until he r she has the cash t exercise (at $1.00 per share) r believes the value f the stck exceeds $1.00 per share. Fr sme emplyees, this is the best f bth wrlds the emplyee has the right t buy the stck fr $1.00, but is nt bligated t buy the stck. The emplyee keeps his r her $ but knws he r she can purchase the stck at any time until the ptin expires. Startup is able t grant an ptin t the emplyee which may mtivate the emplyee, but has nt had t issue actual stck t the emplyee. 7

8 Fast-frward t several years later Startup has gne gang-busters and nw Startup has had experts value its stck at $10.00 per share. The emplyee is hlding an ptin t purchase the stck at $1.00 per share. When the ptin is exercised, the emplyee will pay $100.00, but will receive stck that is valued at $1,000, a gain f $ Hwever, if instead, the Startup stck had decreased t $0.10 per share (frm the initial exercise price f $1.00 per share), the emplyee can just hld the ptin (and nt exercise the ptin) until it expires and hpe that its value increases. The emplyee keeps the $100. If the emplyee had purchased the stck fr $1.00 per share, it wuld nw nly be wrth $0.10 r $10, a lss f $90. This is why ptins cntinue t be attractive t startups and their emplyees. The fllwing are descriptins f varius incentive cmpensatin alternatives, with particular emphasis n equity cmpensatin plans. A chart is prvided at the end f this discussin which lists and cmpares the principal relevant characteristics f each alternative. Equity Cmpensatin Arrangements. Restricted Stck. Restricted stck plans prvide fr the grant r sale t emplyees f actual equity f the emplyer. Emplyees typically receive the stck subject t restrictins which require them t perfrm services fr the emplyer fr a specified number f years in rder t vest in the stck. If the emplyee terminates emplyment befre the service perid is cmpleted, the unvested prtin f the stck typically must be sld back t the emplyer at the purchase price riginally paid by the emplyee, if any. The emplyee is generally treated as the legal and beneficial wner f the shares fr all perids unless the shares are returned t the emplyer by reasn f failure t satisfy the vesting requirement r, fr certain purpses, unless the emplyee fails t make a Sectin 83(b) electin (see abve). Restricted stck is typically sld t an emplyee at a purchase price equal t the fair market value f the stck at the time f grant, althugh in certain circumstances the emplyer may chse t issue the stck at a discunt t its fair market value (usually a discunt f nt mre than 15% f the stck s fair market value). Stck Optins. Stck ptins are the mst cmmnly used frm f equity-based cmpensatin. A stck ptin gives the emplyee the right t purchase stck f the emplyer r its parent crpratin fr a prescribed price (generally the fair market value f the stck n the date the ptin is granted). The emplyee therefre receives the benefit upn exercise f the ptin f the increase in the value f the stck abve the exercise price. Like mst f the ther frms f cmpensatin discussed in this article, stck ptins typically are granted t emplyees subject t vesting requirements which prhibit exercise f the unvested prtin f the ptin prir t cmpletin f specified emplyment r service requirements (r may permit immediate exercise but with the stck subject t a repurchase right n the emplyer s part that lapses ver the vesting perid in a manner similar t restricted stck). 8

9 An emplyee will generally receive ne f tw types f stck ptins: ISOs and NSOs, which are discussed in mre detail belw. In particular, ISOs require a stck ptin plan t be in place and that the cmpany fllws certain steps t prperly issue its ptins. Remember, imprper ptin issuances may lead t unintended tax liabilities fr bth the cmpany and the emplyee. T prperly enact and maintain yur stck ptin plan, the cmpany shuld fllw certain rules t prperly grant stck ptins t its emplyees. Rules fr a prper ISO Stck Optin Plan Stck Optin Plan must be in writing; Stck Optin Plan must be apprved by the sharehlders f the cmpany within twelve mnths f the plan s adptin by the bard f directrs (the plan may als be apprved up t twelve mnths prir t adptin by the bard); Optins must be granted within ten years f the frmal apprval f the ptin plan; Optins must expire less than ten years frm issuance (r five years frm issuance fr any hlders f mre than 10% f the cmpany s stck); Optins must be granted nly t emplyees f the cmpany (nt t directrs r cnsultants); Optins must be exercised within ninety days f terminatin f emplyee status r ne year fllwing the death r disability f the emplyee; The value f the stck t vest in any ne year under the ptin (based n the value at the grant date) shall nt exceed $100,000; and Optins may nt be transferable except in the event f death by will r laws f distributin f assets. The cmpany shuld have a stck ptin plan in place that meets the criteria abve befre issuing any ptins t emplyees. Incentive stck ptins. Incentive stck ptins ( ISOs ) are ptins that satisfy the requirements f Sectin 422 f the Internal Revenue Cde f 1986 (the Cde ). The Cde prvides special tax treatment in cnnectin with the exercise f the ptin and the dispsitin f shares subject t the ptin. Key requirements f Sectin 422 are that ISOs be granted nly t emplyees f the cmpany r its parent r subsidiary, and that the exercise price f an ISO be n less than the fair market value f the stck (as determined in gd faith by the cmpany s bard f directrs) n the date f grant. There are n federal incme tax cnsequences upn grant f an ISO. Upn exercise, the emplyee incurs n tax liability unless he r she is subject t the alternative minimum tax ( AMT ) under Sectin 55 f the Cde. Upn sale f the shares (assuming that the sale des nt ccur within ne year after the date f exercise nr within tw years after the date f grant), any gain is taxed t the emplyee as lng-term capital gain. If the shares are dispsed f within ne year after the date f exercise r within tw years frm the date f grant, the emplyee will recgnize rdinary incme t the extent f the lesser f 9

10 the excess, if any, f (1) the fair market value f the shares n the date f exercise r (2) the sales prceeds, ver the exercise price. Dispsitin includes nt nly a sale but als gifts and certain ther transfers. The cmpany is entitled t a federal incme tax deductin nly t the extent that the emplyee recgnizes rdinary incme n the dispsitin f the shares acquired pursuant t the ISO. N deductin fr the cmpany arises frm any AMT liability incurred by the emplyee. Therefre, in situatins where the ptin qualifies as an ISO at all times, the cmpany has n federal tax cnsequences with respect t that ptin. Nnstatutry stck ptins. Nnstatutry stck ptins ( NSOs ) are stck ptins which d nt satisfy the requirements f Sectin 422 f the Cde and are nt eligible fr special tax treatment. NSOs are ften issued t nn-emplyees such as cnsultants, wh are nt eligible t receive ISOs r participate in statutry emplyee stck purchase plans, and t key emplyees r directrs t whm the cmpany wishes t grant ptins cntaining terms nt permitted by Sectins 422 and 423 f the Cde. Assuming that the NSO des nt have a readily ascertainable value at the time f grant (and virtually n NSOs d), there are n tax cnsequences fr the ptinee at the time f grant. Upn exercise f the NSO, the emplyee will recgnize rdinary incme in the amunt f the excess, if any, f the fair market value f the shares at the time f exercise ver the exercise price. This rdinary incme will be subject t withhlding by the cmpany if the ptinee is an emplyee, either frm the current earnings paid t the emplyee, by an ut-f-pcket direct payment t the cmpany, r thrugh ther means the cmpany may chse t allw. Upn sale f the shares, the emplyee will recgnize capital gain r lss in an amunt equal t the difference between the sale price and the fair market value f the shares n the date f exercise. If the shares have been held fr mre than ne year prir t the sale, the gain r lss will be treated as lng-term capital gain r lss t the ptinee. The cmpany is entitled t a federal incme tax deductin t the extent f the rdinary incme recgnized by the ptinee upn exercise f the NSO. Optin is Granted Optin is Exercised N Tax Deductin N Tax Deductin NSOs and ISOs: Tax Impacts Emplyer Emplyee ISO NSO ISO NSO N Tax N Tax n Grant Deductin (unless ptin has a readily ascertainable market value) Tax Deductin n spread between exercise price and market value at time f N Tax n Exercise ther than AMT, which may apply N Tax n Grant (unless ptin has a readily ascertainable market value) Tax n spread between exercise price and market value at time f exercise 10

11 Sale f Stck frm Optin Exercise Tax Deductin fr a Disqualifying Dispsitin. N Tax Deductin fr a Qualifying Sale. exercise N Tax Deductin Tax spread frm exercise price and sale price, which is taxed as rdinary incme r capital gain/lss depending n hlding perid. Tax spread frm exercise price and sale price as capital gain/lss (lng- r shrtterm) Equity-Based Cash Cmpensatin Alternatives. Phantm Stck. Phantm stck is a frm f incentive cmpensatin which gives the emplyee a cntractual right t receive amunts linked t the value f the emplyer s equity (r sme ther measure f the value f its business r a prtin theref), but which des nt invlve the actual issuance f stck r ptins t the emplyee. Stck Appreciatin Rights. Stck appreciatin rights ( SARs ) are similar t phantm stck in that an SAR gives the emplyee a cntractual right t receive cmpensatin based n the value f the emplyer s stck r sme ther perfrmance measure, but des nt invlve the issuance f any actual equity r ptins f the emplyer. Cash Bnuses. A third cmmn frm f cash incentive cmpensatin are emplyee bnuses tied t achievement f specified perfrmance gals. In cntrast t phantm stck r SARs, where the amunt f cash cmpensatin received by the emplyee is based n the value f the emplyer s equity r business (r a prtin theref), bnuses typically prvide fr payment f fixed dllar amunts t the extent that specified perfrmance gals fr the emplyer are a particular business unit f the emplyer are met. Summary Fr mst cmpanies, stck ptins (as well as cash bnuses) are still the preferred incentive methd, at least fr high-grwth, venture-backed cmpanies; hwever, each cmpany s circumstances are different, and cunsel s rle is t intrduce the varius ptins t ur clients s that they can make an infrmed decisin. 11

12 Here is a summary f the cmmn frms f emplyee cmpensatin prgrams: Restricted Stck Optin Phantm Stck SARs Cash Bnus Payment frm Stck Stck Usually cash Usually cash Cash Ecnmic benefit t emplyee Value f equity Stck value increase Value f equity r ther perfrmance measure Increase in value f equity Set dllar amunt if gals met Legal rights f emplyee Equity wnership Equity wnership Cntract right Cntract right Cntract right Vesting Usually Usually Usually Usually Nne Tax Treatment f Emplyee Incme n receipt based n then value, if electin made Incme generally n exercise unless ISO (in which case may be AMT) Incme when phantm stck cashed ut Incme when exercised Incme when bnus paid Tax Treatment f Emplyer Deductin equal t emplyee s incme Same, except n deductin if ISO and hlding perids met Deductin equal t emplyee s incme Deductin equal t emplyee s incme Deductin equal t emplyee s incme Accunting Treatment Cmp. expense ver vesting perid N cmp. expense if exercise price nt less than stck s FMV at grant Cmp. expense as value increases Same as phantm stck Cmp. expense when paid Please nte that the abve discussin nly cvers sme f the mre cmmnly used frms f equity and equity-like cmpensatin and is summary in nature. There are a number f qualificatins and special tax, accunting and ther rules which may apply depending n the circumstances. In additin, there may be securities law implicatins assciated with certain f the alternatives discussed abve. Each f these cmpensatin alternatives may be mdified t suit the needs f the particular cmpany.

13 EXHIBIT A High Tech Startup, Inc. Initial Capitalizatin Capitalizatin Table as f => 1/1/2009 Assumptins: Authrized Shares 10,000,000 Funders Stck - T Be Issued 8,000,000 Optin Pl - T Be Reserved 2,000,000 Remaining shares available fr issuance - CLASS RECIPIENT SHARES % f Series Fully Diluted FOUNDER SHARES Sally Funder 4,000, % 40.0% Mike Techie 2,400, % 24.0% Jane Designer 800, % 8.0% Mark Angel 800, % 8.0% [TBD] Issued Funders / Executive 8,000, % 80.0% 2009 STOCK PLAN Ttal Optins Reserved 2,000, % 20.0% Ttal Optins Granted Optins Exercised Cancelled/Expired Optins Optins Outstanding Optins/Shares Available fr Future Issuance TOTAL (fully diluted) 10,000, % 100.0% Ttal Cmmn Stck (incl. Shares issued under Plan): 8,000,000 Ttal Optins: 2,000,000 Shares Issued Upn Exercise f Optins and Purchase Rights: 0 Reserved but Unissued Under Plan: 2,000,000