Stock Warrant Agreement
The Agreement Between a Company and a Consultant that Grants the Consultant the Right to Purchase the Stock or Units of a Company
What it is: This agreement template is one of the various forms of Sweat Equity that is built into our app. It is incorporated into the Sweat Equity Agreement and a specific SOW that calls for all or part of the compensation for a specific deliverable by a Consultant to be compensated in the form of a stock warrant. A stock warrant gives the Consultant the right, but not the obligation, to purchase equity at a specific price, called the “exercise” or “strike” price. Holding a warrant gives the Consultant the ability to purchase the stock at a certain price at any time in the future until the warrant expires. A warrant has significant tax advantages for the Consultant rather than simply issuing equity.
How it is used:
A Company should use a Stock Warrant Agreement to issue equity to a Consultant in order to avoid adverse tax consequences when issuing equity in exchange for any work deliverables. If a Consultant is simply granted equity, then the value of the equity is immediately taxable in the form of personal income taxes at the time of issuance (typically at a time with the lowest probability of the future value of the equity). However, if a Consultant receives a Stock Warrant (even with a very low exercise price), the issuance of the Warrant is not taxable and, if the Stock Warrant is exercised at least a year in advance of an exit event, the upside of the equity is taxed at capital gains tax rates and not personal income tax rates. (Be sure to seek competent legal and tax advice when choosing amount the various forms of Sweat Equity to avoid any negative consequences)
Our app will walk you through the step-by-step process of filling in all blocks of information, along with all of the necessary tips, instructions, and examples
This agreement form will typically only take a couple of minutes to complete if you have the necessary inputs at hand
Once you've completed the form, you can download and send it to your attorney and/or tax advisor to review and/or sign online and send it to the Consultant to review and sign
All completed forms for all Sweat Equity Consultants that you complete are logged in your subscriber dashboard
Complete one overall Sweat Equity Agreement for each Consultant
Complete a separate Statement of Work (SOW) for each phase of work
Issue the Sweat Equity upon acceptance of the deliverables
Compare this table with the other forms of Sweat Equity on our Sweat Equity 101 page.
Degree of Flexibility
Very flexible – can issue small amounts for specific deliverables over the life of the Company
Potential Tax Consequences
Non-taxable at issuance as it does not create Phantom Income (the fact that the Consultant is paying for the equity when exercising the Warrant gives them basis), Capital Gains tax upon an exit if the Warrant was exercised at least one year prior to exit
Type of Upside
The same common stock or units as the primary founder
Basis of Sweat Equity Value
Overall value of the company
Realizing the Value of Sweat Equity
Only upon a successful exit
Current Valuation of the Company
Ideally, the Consultant is issued the amount of equity that equals the value of their contribution divided by the sum of the negotiated pre-money value of the Company, and the value of the contribution (e.g. if it is agreed that the Consultant’s contributed value is a total of $250k and the negotiated value of the Company prior to issuing the Sweat Equity is $1m, then the Consultant’s Founder’s Equity should be calculated as follows: $250,000/($1,000,000 + $250,000) = 20%).
The nominal cost of a low exercise price more than offsets the personal income tax rate that is avoided at issuance, no downside protection for the Consultant if the Company fails, and no downside protection for the Company if the Consultant fails to deliver. Note: we recommend issuing Warrants instead of Common Equity after Founding because of the negative tax consequences of simply issuing Common Equity. Be sure to seek competent tax advice when deciding on how to issue or receive equity.
What it contains: Our Stock Warrant template is a 10-page agreement that is incorporated into the overall Sweat Equity Agreement and Statement of Work and includes the following items:
Term and Exercise - this agreement contains the specific information for how the Stock Warrant is exercised, including a Net Issue or "Cashless" exercise and the overall term of the warrant.
Treatment of the Shares - the agreement form includes all of the necessary language on how the underlying equity is treated and the potential for dilution, stock splits, and reverse splits.
Shareholder Rights - the agreement also contains provisions on the rights of the Warrant holder before and after exercise, along with limitations on transfer of the Stock Warrant.
General Provisions - the Stock Warrant agreement includes other required details regarding representations and warranties, securities notices, notice of exercise, and an assignment form.
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