Shares should not be transferred free of cost, as the capital structure may a) bring in the taxman who says it’s a deemed benefit that should be taxed as income in the buyer’s hands and b) it’ll appear in due diligence forever and you will be asked why every single time.

http://www.nseindia.com/content/nsccl/nsccl_focorpactions.htm is the link for how NSE does adjustment for options when there are dividends and bonuses. This does not apply to private firms - I don’t know if there are any regulations saying you have to do it like the NSE. But if you do use it, explaining will be easier to the tax department why it was done this way.

I’d slightly disagree with Krish. (but yes, dividends and bonuses are probably not that big a deal to think about right now) I’ve been through a legal due diligence in the recent past, during the sale of my last employer. The accountants and lawyers will find every nit picking way to stall and question and negotiate, and if you screw up something like stock based compensation you will end up in accountant/legal hell, or at least make you believe hell exists. Keep it simple, but don’t shove it aside and “work it out later”.

Krish, you are right. We are trying to hammer out the MOU, however we want to execute the stock comp the correct way, so that we wont have any complications (for the company or the CEO) later on.

Alok, yes thats another big problem. Thats why we are trying to figure out the right way to give the stock comp.

Srinivas, you can assume a 25% dilution with the promoters holding the rest.

Vamsi.

Have some basic understanding on compensation, set performance benchmarks and focus on hitting the market. Don’t waste too much time haggling for option structure. There’s no fun in holding 1/3rd stake in a startup that never takes off.

Now the company can recover this from the employee. Again in public companies, no problem.

What about private companies? They have to get their company valued by a “class 1 merchant banker” (read: big fees). And this is not a one timer, it’s for every vesting. Plus, how do you recover the FBT from an employee at all? the shares aren’t traded, and if hte value is huge (let’s say a VC came in and provided a big chunk of money at a big ticket valuation) the company is liable to pay a lot of money for an intangible benefit. Yeah, i know, silly law, but it’s the law.

So RSU (Restricted Stock Units) are better. For that you need to create a separate entity - could be a trust or a separate company owned by the founders. The company allocates shares to say the new CEO, and the trust has the right to buy back the shares at par. The right dissolves over four years (say after year 1, itt becomes the right to buy back 3/4th the shares and so on) This is a good policy and the reason the company can’t buy back its own shares is that there are some restrictions on the buying back of any shares by a company itself.

Still you will have to do the 55L transaction to the employee (and which is compensation so take out 33.99% of it as TDS, paid to the government)

Of course if you have no problem with the current owners diluting then yes of course you can sell your shares. Just transfer 5 lakh shares to the new CEO from current owners (get a share transfer form and do the regulatory paperwork) and pay some stamp duty and you’re done.

(Btw, is there a person who can help with this stuff in Mumbai? I need to do some of this myself)

And if you’re still going the stock options route: for dividends and bonuses the strike price and quantity should adjusted accordingly. No voting rights. If you want to see how the NSE does it, let me know, I can send you a link.

I would like to know two things - what is the dilution you have done during first round funding and what is the stock holding percentage of promoters post funding.

Once this information is available I can suggest a very practical solution.