Share this Page URL

Ownership of a Corporation: Equity > To Employees - Pg. 39

First Steps To Investors 39 Later investors often receive convertible preferred stock or preferred stock with warrants. There are two main reasons for this: 1. Investors like preferred stock because it carries payment priority over common stock (prefer- red stockholders are paid back first) in case of bankruptcy. Some investors try to get upside participation as well in the form of conversions or warrants attached to the preferred stock. The company wants to avoid having all of its equity priced at the valuation the investors paid, because it would be much more expensive for employees and founders to purchase. A com- pany can point to the preferred stock's extra rights and show the IRS that the common stock should be valued at a significant discount, thus enabling the company to continue giving out common stock and options at advantageous exercise prices and minimizing the tax liabilities to their employees. 2. To Employees An employee option plan is valuable to employees if 1. 2. They receive stock options at a low valuation and can exercise and sell those shares at a later date; the grant is taxed at LTCG and not OI rates; and The employee does not incur an undue or poorly timed tax obligation.