What are the Top 10 legal questions to consider in starting and growing a tech business? Outlined below is question #3 in this series of questions a lawyer asks an entrepreneur to minimize liability and maximize profitability (view question #1 here and question #2 here). These questions address legal issues faced by tech companies through the business life cycle. While these questions may not apply to all companies, they’re a helpful road map to address legal pitfalls in building a successful tech business.

Following the question below, there are secondary questions designed to elicit important information from the entrepreneur. Then, the legal conclusion and practical pointers are included. As referenced below, the new venture to be formed by the entrepreneur is Newco and the current (and soon to be former) employer of the entrepreneur is Employer.

Q3:      Does the entrepreneur have options or restricted stock in the former Employer?  If so, how will they be impacted when the entrepreneur departs to form Newco?

An entrepreneur departing the employment of the Employer may be leaving behind significant value in the form of stock options, restricted stock or other employee benefits of the Employer.  Several key questions need to be considered by the attorney in the early stage of representing the entrepreneur before formation of Newco.

1. Does the entrepreneur have options or restricted stock that will be impacted or forfeited if the entrepreneur leaves the Employer’s employment and starts a new venture?

2. Does the type of termination from employment impact the status of the entrepreneur’s options/stock — for example, does a voluntary termination adversely affect vesting or result in a forfeiture?  Is it actually a constructive termination (e.g. a demotion or transfer to a remote location) that may permit the entrepreneur to retain the equity in the Employer?

3. Is there a stock repurchase agreement whereby restricted shares can be repurchased by the former employer upon termination?  If so, what is the repurchase price and is it impacted by the nature or the form of termination (for example, a voluntary termination resulting in a lower valuation than a termination without cause or constructive termination)?

4. Did the entrepreneur made a Section 83b tax election at the time the restricted stock was issued?  If not, what is the tax impact of the lifting of restrictions on the stock, and have they been considered by the entrepreneur?

5. Does the entrepreneur want to exercise stock options in the former Employer following termination of employment?  If so, is it permitted under the former Employer’s Option Plan?  Does the plan include a repurchase provision whereby exercised options can then be repurchased by the Employer (which may negate the desire to exercise the options)?

Answer:  Entrepreneurs should carefully review their existing equity position before terminating employment.  In particular, the Option Plan and Restricted Stock Agreements should be reviewed to determine the rights and obligations of the entrepreneur with regard to equity of the Employer following termination.  Too often, these documents are overlooked until after termination, resulting in limitations on the ability of the entrepreneur to exercise legal rights.