Documenting Equity and Revenue-Share Grants to New Executives

Attorney Answer

Granting 1% equity plus a per-project revenue share to each executive takes several separate written documents, executed correctly and on time — and getting one tax-election deadline wrong can permanently change how that equity is taxed.

If you are issuing actual equity now rather than a right that vests later, each recipient may want to consider an election under 26 U.S.C. § 83(b), which lets a person who receives property in connection with performing services elect to include the value in income for the year of transfer rather than as it vests. That can matter a great deal if the company's value rises. The election must be made no later than 30 days after the date of transfer, and that timing is effectively jurisdictional — it cannot be cured late.

Because you are issuing securities to individuals, the offering needs to qualify for an exemption or be qualified. Corp. Code § 25102(f) exempts an offer or sale meeting each of four criteria: sales to no more than 35 persons; each purchaser either having a preexisting personal or business relationship with you or your principals, or having the business or financial experience to be assumed capable of protecting their own interests; each purchaser representing that the purchase is for their own account and not with a view to resale; and no publication of any advertisement in connection with the offer or sale. The statute also directs that the issuer file a notice of the transaction, and a late filing carries a fee equal to what qualification would have cost.

On the revenue-share piece: Lab. Code § 2751 requires a written contract setting out the method by which commissions are computed and paid, with a signed copy given to the employee and a signed receipt obtained. But it applies to an employer's contract of employment with an employee — not to every person rendering services. Whether it reaches these two executives depends on whether they are legally employees or independent contractors, and that classification is itself a contested, multi-factor question rather than something you get to decide by label. The statute also carves out bonus and profit-sharing plans unless the employer has offered a fixed percentage of sales or profits as compensation for work to be performed, which is worth examining against how you structure the 1% of billings.

What you can do

1. Have a corporate attorney draft the equity issuance documents for the 1% grants and a separate written agreement for the revenue share, stating exactly how the 1% of billings is calculated, when it is earned, and when it is paid.

2. Settle the employee-versus-independent-contractor classification for each executive before papering the revenue share, since it determines which framework governs and drives payroll and withholding obligations generally.

3. If equity is issued now, have each recipient consult their own tax advisor about a § 83(b) election within 30 days of their transfer date.

4. Screen the offering against all four criteria of Corp. Code § 25102(f) and make the required notice filing if you rely on that exemption.

5. Keep the cap table current and document board or shareholder approval of the new issuances.

Time limits: An election under 26 U.S.C. § 83(b) must be made no later than 30 days after the date of transfer, and it cannot be extended or cured afterward. That date is specific to each grant and this answer cannot calculate it for you — have each recipient confirm their own transfer date with a tax advisor promptly.