Jacksonville Startup Attorneys & Lawyers

Preferred Equity: What is it?

Preferred equity is a general term used to describe any class of securities (stock, limited liability units, limited partnership interests) that has higher priority for distributions of a company’s cash flow or profits than common equity. Typically, all cash flow/profits remaining after required payments to a company's lenders are distributed to the preferred equity investors until they receive the full amount of a previously agreed upon return, commonly stated as a fixed percentage annual rate.

Preferred equity can also be thought of as form of equity measurement that takes into account the company’s preferred shareholder equity and disregards common shareholder equ

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Key Takeaways

• Nonqualified stock options (NSOs) are flexible equity compensation tools that can be issued to employees and non-employees.
• Unlike incentive stock options (ISOs), NSOs are taxed at exercise as ordinary income, with additional capital gains tax possible on later appreciation.
• NSOs can be a strategic tool for startups and growing companies to reward and retain key talent without immediate cash outlays.
• They come with specific tax implications for both the granting company and the recipient, including withholding requirements.
• Companies can design NSO plans with vesting schedules, exercise methods, and expiration terms tailored to business goals.
• Early exercise and 83(b) election strategies may impact how and when tax is paid.
• It's important to understand how NSOs affect ownership, taxes, and long-term planning.

Non-qualified stock options give you an alternative way of compensating employees

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Key Takeaways

• Phantom stock plans are highly customizable and can include dividend-equivalent rights, multi-tiered vesting, and tailored payout structures.
• Startups and private companies increasingly use phantom stock to retain talent without diluting ownership.
• Phantom stock requires careful compliance with ERISA, IRS 409A, and other regulations to avoid penalties.
• Risks include potential cash flow strain at payout, valuation disputes, and employee misunderstandings about non-ownership.
• Administration can be complex, needing clear documentation, v

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Key Takeaways

• Drag-along rights allow majority shareholders to compel minority shareholders to sell in a company sale.
• These rights ensure full ownership transfer and protect deal completion.
• They typically require identical sale terms for all shareholders, including minority ones.
• Term sheets often include drag-along clauses and waive appraisal rights to streamline exits.
• Important considerations include who can trigger the drag-along, required approvals, and liability distribution.

What Is a Drag Along Right?

A drag-along right, drag along provision, or bring along right, is a right that gives majority investors the ability to sell a company to a third-party without consent from minority shareholders. This helps protect the majority and eliminate the minority. However, minority shareholders still receive an equal sales price, terms, and conditions as the majority. In a sale, the drag along agre

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