What is the best way to set up a profit-share pool for my startup’s employees?

First, make sure that whatever you ultimately decide to do follows The Department of Labor’s recommendations which include:

– Using a written planning document

– Establishing a trust for the assets of your plan

– Have a record keeping system of some sort in place

– Give plan information to those who are determined to be eligible for profit sharing

Also, you don’t have to administer the profit sharing plan on your own. You could (and may want to) hire a third-party administrator to help you. This doesn’t just help you with administering the profit share. It helps you keep proper records and keeps you in compliance with your fiduciary responsibilities. This is important because you may determine that you need to change your plan in the future.

Next, determine if you want to use profit sharing as part of the base compensation or if you are looking to set up a retirement plan that involves profit sharing. Again, both would be easier for you to do if you hired a third-party administrator.

With the base compensation profit sharing, you should consider three questions:

– How much of an incentive for performance should profit sharing be? Because you certainly don’t want to give up quality for quantity.

– Which employees will be eligible? This goes back into your vesting (or sign and run as you put it).

– Will the amount available vary?

If you choose a retirement profit sharing option, ask the following questions:

– How much of the profit will be available for this form of profit sharing?

– Which employees will be eligible and when will they be eligible? One of the nice things about retirement profit sharing is that they generally have to work for you longer to be vested enough to receive anything.

– Should the amount of profit available be different depending on what your employees do for your company? For instance, if you have an administrative assistant, would he or she receive the same amount as a mid-level manager? Would a mid-level manager receive the same amount as someone in upper-management?

I know that you said you don’t want to spend a lot of money on an attorney for this, but with all of the varying factors and constraints that complicate your situation, and the fact that The Department of Labor has specific recommendations, it really is worth the money to either talk to an attorney or a brokerage firm that specifically handles profit sharing. Otherwise, you could end up with an even bigger legal bill if something isn’t done properly.

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