Trent Dykes

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As a general rule, all stock option grants need to have an exercise price at or above the fair market value of the company’s common stock on the date such grant is made. This requirement, and its many related complexities, generally comes from Section 409A of the Internal Revenue Code and the related Internal Revenue Service (“IRS”) regulations (collectively, “Section 409A”). Section 409A was enacted several years ago in response to perceived abuse of deferred compensation arrangements brought to light during various high-profile corporate scandals.

The two main penalties imposed by Section 409A for granting a stock option with an exercise price below fair market value are (i) immediate tax upon vesting of the option (as opposed to at exercise or sale) and (ii) an additional 20% federal tax penalty (on top of the regularly applicable federal and state taxes). In addition, some states, such as California, may impose their own Section-409A-equivalent penalty tax. In order to avoid these penalties, the IRS requires that a stock option must be granted with an exercise price no less than the underlying shares’ fair market value determined as of the grant date and that such fair market value must be “determined by the reasonable application of a reasonable valuation method.”

The good news is that Section 409A provides three “safe-harbor” methods for determining fair market value, two of which are most commonly relied upon by startups and venture-backed companies (discussed below). If one of these safe harbor methods is used, then the resulting fair market value is presumed to be “reasonable” unless the IRS can establish that the company’s determination was “grossly unreasonable.”Continue Reading Establishing fair market value for purposes of Section 409A and stock option grants

If you are a startup and considering how to make the most of your marketing dollars, I would highly recommend that you read Mark Suster’s post “How to use PR Firms at Startups.”  If done properly, public relations can be an excellent tool to help get the word out about your startup and its products – and Suster’s post provides some great thoughts to consider.

Also, if you do not already read Suster’s blog Both Sides of the Table, I highly recommend that you do.
Continue Reading How to use PR Firms at Startups

Just a reminder to those who have Delaware corporations, your annual report and franchise tax payment are both due on March 1. At this point, you should have already received from Delaware your notification of annual report and franchise tax due, which is sent to a corporation’s registered agent in December of each year (although sometimes it does not arrive until January). Delaware requires these reports to be filed electronically.

As you will notice, there are two methods that you can use to calculate the amount of Delaware franchise tax due for your corporation (i.e., the “Authorized Shares Method” and the “Assumed Par Value Capital Method”), which result in vastly different amounts due. The default payment amount listed on your notification is set by Delaware using the Authorized Shares Method, which method will almost always result in a much high amount due for startups with limited assets. The minimum franchise tax is $75 and the franchise maximum tax is $180,000.

Here are some examples showing how the different methods can dramatically impact the amount of Delaware franchise tax due:Continue Reading Delaware franchise tax due March 1: two methods of calculation, two vastly different results

Compliments of Jason Smith of Kidder Mathews, attached is a Seattle office real estate market review for Q4 2011. As the report notes, 2011 showed highly stratified results. Class A space saw strong absorption, a high level of investment activity and even some firming of rental rates at the end of the year. The rest of the market was flat at best, although value-added investors showed more interest in the last half of the year, perhaps a harbinger of pending improvement in that end of the market. This split performance mirrors…

Continue Reading Seattle Office Real Estate Market Review for Q4 2011

This post is part two of our series exploring various aspects of due diligence in the context of a merger and acquisition (M&A) transaction. Our prior post discussed M&A due diligence generally and its objectives. This post will focus on the due diligence process.

Due diligence is routinely time consuming and often complex. However, the process can be manageable and cost-effective if a party spends time in advance creating a due diligence plan and forming a due diligence team.Continue Reading M&A Due Diligence: The Diligence Process (Part 2)

Compliments of Jason Smith of Kidder Mathews, attached is a Seattle office real estate market review for Q3 2011. As the report notes, the regional vacancy rate decreased in Q3 2011 and is expected to decrease again in Q4 2011 and, barring a deep double-dip, rental rates may have bottomed out across the region, with some firming in a few specific class/location combinations.Continue Reading Seattle Office Real Estate Market Review for Q3 2011

Our colleague Mimi Hunter recently summarized the basic aspects of due diligence in the context of a venture capital investment (What is due diligence?). In this series of posts, I will highlight considerations for due diligence in the context of a merger and acquisition (M&A) transaction.

M&A due diligence generally

The term “due diligence” describes the process each of the parties undertakes to investigate the other before a final decision is made whether to proceed with the transaction.Continue Reading M&A due diligence: overview and objectives (part 1)

Earlier this week, I attended the TechNW 2011 conference organized by the Washington Technology Industry Association (WTIA). The conference was very informative and full of interesting presenters and topics. The corporate development panel discussion moderated by Tom Huseby (General Partner and founder of SeaPoint Ventures) was particularly interesting for startups (and relevant to my practice). The panelists were Neeraj Arora (Principal, Corporate Development at Google), Ryan Aytay (VP of Corporate Development at Salesforce.com), Ryan Cooper (Corporate Development Director at Microsoft), and Amin Zoufonoun (Director of Corporate Development at Facebook), all companies that have grown a great deal through partnerships as well as acquisitions of other companies. The general discussion surrounded merger and acquisition activities and drivers from the perspectives of Facebook, Google, Microsoft and Salesforce.com.

Two specific questions relating to the value of investment bankers in the M&A context and timing of the M&A process stuck out because they are questions that frequently come up with early stage companies.Continue Reading Perspectives on M&A from Corp Dev Execs at Facebook, Google, Microsoft and Salesforce.com

One of the more confusing parts about forming a startup is sorting through the dozen or so documents that may come into play. Below are the basic organizational documents to consider when forming your startup. Which documents are applicable to your startup may differ, depend on your startup’s specific circumstances (e.g., number of founders, alignment of founder expectations, financing plans, whether or not there will be non-founder employees, tax elections, etc.), but these are the versions we typically see.
Continue Reading What documents do I need when forming my startup?

Compliments of Jason Smith of Kidder Mathews, here is an interesting report that analyzes the last two complete Seattle and Eastside commercial real estate cycles going back to 2000 and includes the “causes and effects” of the events that precipitated each down cycle, as well as the actions that ultimately assisted in the recovery of these markets. I spoke with Jason about how he is using this research to help his current client base. Like similar challenges that have multiple moving parts, there is not one silver bullet solution –…
Continue Reading Seattle and Eastside Office Vacancy and Employment Report