When does my startup need to adopt a stock plan?
Many major Silicon Valley law firms have their clients adopt a stock plan at formation. This is considered a best practice for a few reasons:
1) State securities compliance filing fees are often lowest at formation because many states, including California, base the fees on the value of the shares reserved in the stock plan. In California, these filing fees can range from around $200 all the way up to $2,500.
2) As a company grows, the complexity, time, and expense involved with adopting a stock plan usually increases. With the addition of stockholders, investors, or directors, additional approvals are generally required in order to adopt a stock plan in compliance with Delaware corporate laws. Special investor approvals may also be required under the terms of some investment documents.
3) Most of the problems we see with stock plan adoptions occur when it has been delayed and the company’s capitalization table has become complicated. At formation, a company’s capitalization table is usually the simplest it will be, which significantly reduces the chance of error when adopting the stock plan.
Some startups postpone adopting a stock plan until they need to grant equity to service providers. If you decide to do this, a best practice is to leave however many shares would have been reserved for issuance from the stock plan unissued. Otherwise, you may need to file an amendment to your certificate of incorporation to increase the number of shares your company is authorized to issue.