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How to create holding company to manage employee Restricted Stock pool?

We are contemplating on establishing a holding company to hold the entire Restricted Stock Pool for employees. The holding company would be established in a jurisdiction where new shareholder registration is straight forward (we are planning to give RSUs for lot of people). This arrangement might also provide some tax benefits for the employees. As added bonus it would also keep the operating company's cap table cleaner. Anybody done anything similar? Any experiences or thoughts on advantages/disadvantages of this type of arrangement?

6 Replies

Neil Gordon
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Neil Gordon Advisor
Board Member, Corporate Finance Advisor and Strategy Consultant
So instead of holding restricted stock in the startup, everyone would hold restricted stock in the holding company? Where's the simplification? You have the same accounting for numbers of shares held and vesting schedules, and exactly the same number of beneficial owners of restricted stock.

Might provide tax benefits? Can you explain?

Seems your can table would be the same in either case, too; one line that reads, "Restricted stock" with disclosure of what's vested.

Tell me what I'm missing.
Gopi Mattel
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Gopi Mattel Advisor
Director, Chennai Area at The Founder Institute
Does this count the founders as employees? I am guessing not. Hmm, if I were an employee, i would not trust this arrangement. I as an employee will hold stock in a completely different corporation? I could see a number of different ways to play games with employee stock in this way. Silicon Valley investors have a well-deserved reputation for screwing over employees. And it would not be too long before they would want the founders also to be part of this holding company.
The benefits seem negligible for such as risk to the employees.
I can argue this a different way, try putting all the investor's stock in a holding company instead and see how that flies. :)
David Schwartz
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David Schwartz Entrepreneur • Advisor
Multi-Platform (Desktop+Mobile) Rapid Prototyping + Dev, Tool Dev
I strongly encourage you to read Slicing Pie first.
Karl Schulmeisters
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Karl Schulmeisters Entrepreneur
CTO ClearRoadmap
Get a product out first. focusing too much on the structure of your stock shares before you have launched your product is not a positive sign
Neil Gordon
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Neil Gordon Advisor
Board Member, Corporate Finance Advisor and Strategy Consultant
Karl, financing deals collapse and/or get delayed because corporate record keeping has been ignored. I agree that "focusing too much" is a bad idea, but errors in basic structure can't easily or inexpensively be fixed, and the impact can be and occasionally is fatal.
Perttu Jalkanen
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Perttu Jalkanen Entrepreneur
Co-Founder & Chief Commercial Officer at AREX
Thanks Neil for good comments, I will try to elaborate the idea bit further. Gobi the idea is not to try to cut anybody short, actually quite the opposite.

This was just a quick idea to see if it is possible further cut down red tape on employee stock pool by in essence outsourcing it to trustee. The idea is to be able to incentivize 100s of people easily - this is obviously relevant only when hyper growth occurs, but as Neil pointed out, it is too late to think about then.

As said this is just a raw idea. Here is an example how it would work;

A holding company would be established that would hold e.g. 10-25% of the operating company's stock and would be party to the SHA. The holding company would be managed by professional trustee (whose only interest is to look the best interest of the holding company and its shareholders). SHA would give holding company's trustee a seat (or right to appoint board member) in the operating company's board and he/she would thereby directly represent employees at the board level. Holding company SHA would stipulate that its shares could be only issued to employees of the operating company (and plenty of other things that I have not really even thought yet in detail)

Referring to Gobi's comment, I would argue that individual employee shareholders with 0.x % of the company would be far worse off than being shareholder in a holding company that would own, say 25% of the stock of the operating company and have a board seat.

This would happen in Europe and without going into details as added benefit there could be tax benefits for the employees (obviously depending where they live and on which jurisdiction the holding company would finally be established in, etc). Also the employees could trust that someone professional would be looking after their joint interest in the company.

Would this make any sense? Or maybe there is clear reason why this should not be done?
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