Print This Page

Subject:   Capital Raising for Consulting and Equity
Date:   Thu, 06 May 1999
From:   Dan

Dear Michael Gray, CPA

I like your site!

NQSOs / Equity deals are driving me nutty!!!

So, I thought I'd take advantage of your question and answer offer.

I'm a high-tech consultant who is doing 2 things new:

1. Investment Banking referrals for financing -- I'm working with a group in New York where we are cutting deals with startups. They will pay us with a percent of cash and equity in their firm if anybody we introduce them to gives them money. Typical structure says they pay us 2% of capital raised and 2% of equity sold.
   
   
2. Consulting for equity -- These revolutionary startups also need management consulting. So, in addition to cash, I'd like a deal that says -- you owe us options that accrue at 6x the consulting fee billed. So, @ $200 per hour we also get exercisable options worth $1,200.

My questions are --

1. What are the tax implications of this insanity???
   
   
2. Do these deal structures make sense or should I hide under a rock until the IRS explodes from backed up sewer pipes???

Frazzled in Minnesota

Dan

Answer

Date:   Wed, 28 Jul 1999

Hello Dan,

Sorry I haven’t written to you sooner.

Many consultants in Silicon Valley are participating in the Start Up Lottery by being paid in part with non-qualified stock options.

Similar rules apply to them as to employees, but the ordinary income is not reported on a W-2. It’s reported on a 1099-Misc form.

How the income should be reported by the consultant depends on the form of business. If the business is a proprietorship, the income is reported on Schedule C.

How are you valuing the options you are receiving? You should probably define this in your agreements.

If you aren’t already, you should have an attorney help you in drafting these agreements.

I wouldn’t hold my breath waiting for the IRS to explode.

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, Non-Qualified Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.