Contractors most certainly can vest. A company can grant restricted stock subject to vesting to non-employees.
This is still a bad idea for a number of reasons. The most notable: the author clearly lacks all understanding of the implications of what he's asking for.
1. The author's client would need to prepare the legal documents for his equity compensation package, which could easily cost several thousand dollars. Depending on the structure of the compensation, the company might have to bear additional costs. For example, a 409A valuation can easily exceed $20,000. Please note that 409A can apply to a variety of deferred compensation structures, so your suggestion that the author seek deferred compensation is not necessarily a good one.
2. If the author wants stock options, he would only be eligible to receive non-qualified stock options. These lack the advantageous tax treatment of ISOs.
3. If the author receives stock outright with no vesting, the full value of the stock would produce immediate taxable income.
4. If stock the author receives is subject to vesting, he's going to want to look at an 83(b) election if he doesn't want to find himself in a world of hurt.
5. All of this is complicated by the fact that the author is a foreigner. The UK has a tax treaty with the United States, but he'll want/need the counsel of a competent accounting and legal professional in both countries. Additionally, in some scenarios, the author may not even be able to work with a US company. For example, he could not be a shareholder in an S-corporation, as foreign ownership of an S-corporation is forbidden.
If the author knew the burdens he was placing on his prospective clients, and more importantly himself, it's unlikely he would ever offer his services in this fashion. So as valuable as his skills and experience might be, I would argue he's doing himself a disservice by trying to sell his skills and experience in this fashion.
You could vest according to time. Although you probably wouldn't do the typical four year vest with a one year cliff in the scenario discussed here, you could easily demand that the contractor continue to provide certain services, such as x hours of support each month, to the company over a period of time (say one year). You could also vest upon arbitrary milestones (completion of prototype, launch, acquisition of first paying customer, etc.).
All a vesting schedule does is state when certain restrictions associated with the stock (or stock options) lapse.
Classification does not matter, except for incentive stock options, which are not possible here. You can grant non-qualified stock options to contractors and you can of course issue stock (restricted or not) to just about anyone.
Comments
Contractors most certainly can vest. A company can grant restricted stock subject to vesting to non-employees.
This is still a bad idea for a number of reasons. The most notable: the author clearly lacks all understanding of the implications of what he's asking for.
1. The author's client would need to prepare the legal documents for his equity compensation package, which could easily cost several thousand dollars. Depending on the structure of the compensation, the company might have to bear additional costs. For example, a 409A valuation can easily exceed $20,000. Please note that 409A can apply to a variety of deferred compensation structures, so your suggestion that the author seek deferred compensation is not necessarily a good one.
2. If the author wants stock options, he would only be eligible to receive non-qualified stock options. These lack the advantageous tax treatment of ISOs.
3. If the author receives stock outright with no vesting, the full value of the stock would produce immediate taxable income.
4. If stock the author receives is subject to vesting, he's going to want to look at an 83(b) election if he doesn't want to find himself in a world of hurt.
5. All of this is complicated by the fact that the author is a foreigner. The UK has a tax treaty with the United States, but he'll want/need the counsel of a competent accounting and legal professional in both countries. Additionally, in some scenarios, the author may not even be able to work with a US company. For example, he could not be a shareholder in an S-corporation, as foreign ownership of an S-corporation is forbidden.
If the author knew the burdens he was placing on his prospective clients, and more importantly himself, it's unlikely he would ever offer his services in this fashion. So as valuable as his skills and experience might be, I would argue he's doing himself a disservice by trying to sell his skills and experience in this fashion.
Help me understand how someone who doesn't work for the company vests? What triggers the vesting?
You could vest according to time. Although you probably wouldn't do the typical four year vest with a one year cliff in the scenario discussed here, you could easily demand that the contractor continue to provide certain services, such as x hours of support each month, to the company over a period of time (say one year). You could also vest upon arbitrary milestones (completion of prototype, launch, acquisition of first paying customer, etc.).
All a vesting schedule does is state when certain restrictions associated with the stock (or stock options) lapse.
Classification does not matter, except for incentive stock options, which are not possible here. You can grant non-qualified stock options to contractors and you can of course issue stock (restricted or not) to just about anyone.