Inventor Equity & Taxes FAQ
Inventor FAQs for Equity Tax Issues:
What are the inventors' options related to equity under a license?
What is the process for inventors to elect equity share options?
Do inventors have to pay for the equity shares?
Do I have to pay taxes on the equity related to the license?
If I receive an IRS Form 1099 or 1042S from Stanford, what should I expect to see on the form?
What happens if I forget to send back a signed letter?
What if I want to disclaim the shares?
What can I do if I can't pay the tax withholding as required in the inventor equity letter?
What are the inventors options related to equity under a license?
The inventor may elect to have their allocation of equity in the license (“Inventor’s Shares) distributed to them as soon as practicable following execution of the license.
Or, the inventor may elect to not have the Inventor’s Shares distributed to them, and instead, to receive proceeds, if any, from disposition of such Inventor’s Shares that will continue to be owned and held by the University.
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What is the process for inventors to elect equity share options?
Please click here for the specific details of the OTL Equity Election Process (Link to equity election process document coming soon; please reach out to otl@stanford.edu if you need assistance).
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Do inventors have to pay for the equity shares?
No, inventors do not have to pay for the shares. The shares are granted to inventors through the license agreement between Stanford and the company. However, if inventors elect to receive inventor’s shares directly instead of having Stanford holding the shares until liquidation, inventors may need to pay taxes based on the value of the shares and inventor's current residency.
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Do I have to pay taxes on the equity related to the license?
Depending on the scenarios inventors elected, there may or may not be related tax obligations on the equity.
There are no initial tax obligations for inventors that elect option in which Stanford will manage the inventor's shares alongside its other institutional holdings. Tax responsibilities only arise upon receipt of income from the potential liquidation of these shares.
If the inventor elects to receive and manage their shares directly, there may be tax obligations depending on the value of the equity. Equity is considered miscellaneous income so inventors may receive an IRS Form 1099 (.pdf), CA Form 592-B (.pdf) ,or 1042S (.pdf) from Stanford. Depending on inventor’s citizenship status and California residency status, inventors may be required to pay an estimated tax withholding. OTL Licensing Manager will notify inventors in the form of a letter outlining these obligations. OTL will send the withholding payment to the IRS and/or the California Franchise Tax Board as an estimated tax payment on inventor’s behalf. For more information on estimated tax withholding, please refer to the IRS webpage.
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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 state the total of all your miscellaneous income from Stanford as a lump sum. This lump sum may include your share of cash royalties and the value of the equity that you have received from the license of one or more of your inventions. A copy of your equity letter(s) will help you to understand a portion of the misc. income stated on the tax form. If you have questions or need additional help about IRS forms, please contact the Finance Team at OTL.
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What happens if I forget to send back a signed letter?
If OTL does not receive a signed letter back within the timeline stated in the letter, the default will be that Stanford holds the inventors’ shares until liquidation. OTL will distribute cash proceeds to inventors based on Stanford’s distribution policy.
Please note that if we do not receive a response by the date stated in the election letter, in the form of signed letter with checked appropriate box in order to opt for scenarios 1 or 2, we will assume that you have opted for Option 2 - elect to not have the Inventor’s Shares distributed to them, and instead, to receive proceeds, if any, from disposition of such Inventor’s Shares that will continue to be owned and held by the University.
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What if I want to disclaim the shares?
In certain circumstances, an inventor may have a conflict of interest with respect to the expected licensee and may request to not receive their allocation of equity in the licensee or proceeds from the disposition of such equity. In such cases, an inventor may disclaim any interest in equity and proceeds, by providing written notification to OTL prior to when the license agreement is executed.
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What can I do if I can't pay the tax withholding as required in the inventor equity letter?
If the inventor does not pay the tax withholding, the default will be that Stanford manages the inventor’s shares until liquidation. OTL will distribute cash proceeds to inventors based on Stanford’s distribution policy.