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Stanford
Office of Technology Licensing

Inventor Equity & Taxes FAQ

Inventor FAQs for Equity Tax Issues:

Why do I get equity?

Stanford may at times accept equity from a company as part of the license issue fee of an invention(s). Net equity, i.e., the value of the equity after the deduction of 15% to cover OTL administrative costs, will be shared between the Inventor(s) and the University per Stanford policy. The inventor shares will go directly from the company to the inventors. For more information, please see DoR handbook on Equity Acquisition in Technology Licensing and Distance Learning Agreements.

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What is the process for getting my equity shares?

OTL will request current residency and contact information from the inventors to determine whether any withholding is required to receive the shares. Once OTL receives the information, OTL will send a letter to each inventor asking whether the inventor would like to receive their share of the equity and the requirements, if any, for tax withholding.  The letter will also provide information about the number of shares and the valuation of those shares.  You should promptly determine whether you want to receive the equity shares or not, and then send your signed letter back to OTL along with any payment, if necessary. OTL will then provide your contact information to the company, which will reach out directly to you regarding any additional paperwork necessary for you to receive your shares.

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How are equity shares and their issue value determined?

In licenses to startup companies, OTL will often negotiate a certain percentage of the equity of the startup as part of the upfront consideration for the license. Per policy, the inventors' share of the equity is 28.34% of the total shares owed under the license, which are then split based on the royalty sharing agreement for the licensed docket(s). The value of the shares is provided by the company.

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Do I have to pay for the equity shares?

No, you do not have to pay for the shares. The shares are granted to you through the license agreement between Stanford and the company. However, you may need to pay taxes based on the value of the shares and your current residency.

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Do I have to pay taxes on the equity I receive?

Maybe, as it depends on the value of the equity. Equity is considered miscellaneous income so you may receive an IRS Form 1099 (.pdf), CA Form 592-B (.pdf) ,or 1042S (.pdf) from Stanford. Depending on your citizenship status and your California residency status, you may be required to pay an estimated tax withholding.We will notify you in the form of a letter outlining these obligations. We send the withholding payment to the IRS and/or the California Franchise Tax Board as an estimated tax payment on your behalf. Read here for more information on estimated tax withholding.

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If I receive an IRS Form 1099 or 1042S from Stanford, what should I expect to see on the form?

Your 1099 or 1042S form will list the total of all of your miscellaneous income from Stanford. This could be your share of cash royalties and the value of the equity that you have received from companies associated with the license of one or more of your inventions.  Please keep a copy of your equity letter(s) with your tax forms so you have a record of the value of your equity included in this lump sum. If you have questions about IRS forms, please contact the Finance Team at OTL.

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What if the company ceases to exist, what happens to my shares and my withholding money?

You should seek advice from a tax advisor.

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What if I don't have a tax advisor?

In order to understand your tax liabilities related to receipt of equity, or any write-off possible if a company ceases to exist, you should seek help from a tax advisor. There are many specialized tax advisors available in the area to assist with your questions.

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What happens if I forget to send back a signed letter?

We will assume you disclaim the shares. By disclaiming the equity, you are also irrevocably relinquishing any claims to these proceeds. The resultant disclaimed equity will be added to Stanford's share of equity and all proceeds would go only to Stanford. As such, no Internal Revenue Service Form 1099 related to these shares will be sent to you and no tax payment will be due.

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What can I do if I can't pay the withholding as required in the inventor equity letter?

Contact your OTL Licensing Manager to discuss.

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If I accept the equity now, can I disclaim it later?

No.

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If I disclaim the equity now, can I claim it later?

No.

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What is a Stock Purchase Agreement and who sends it to me for signature?

A Stock Purchase Agreement is the definitive agreement that finalizes all terms and conditions related to the grant of the shares from a company. The company will often require that you sign a Stock Purchase Agreement before you can receive your shares.

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Has Stanford vetted the Stock Purchase Agreement for me?

No, you should seek outside legal counsel to review the agreement for you.

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Who do I contact if I have questions about the equity?

Contact your OTL Licensing Manager or the company contact named in the inventor equity letter.

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