Startups and equity.
Get a startup equity compensation plan to attract and retain the best employees.
- Make sure it’s done right
- Confirm your legal compliance
- Have an equity attorney to turn to
Why startup equity compensation
Startup equity compensation is one way for a business to attract and retain employees. The general idea of equity compensation is to offer employees a share of the company’s future profits in exchange for lower salaries up front. There are a variety of methods for gaining ownership in a company, each of which may have a significant tax burden on both the company and the employees.
Startups that offer equity compensations tend to take the form of stock options, which are used to incentivize employees who can benefit from the increasing value of the stock’s price. The value is theoretical at the outset since a young company usually does not have a valuation: there are no customers, purchase orders, or assets. For companies that are planning on going public and have a promising future, this can be a very appealing option to an employee. This right “vests” with time, so employees gain control of this option after working for the company for a certain period of time. When the option vests, they gain the right to sell or transfer the option. This method encourages employees to stick with the company for a long term.
Make sure it’s done right
Equity is the end game for a lot of entrepreneurs. It’s important to preserve it and use it wisely. A startup equity compensation lawyer will help you be responsible with your company’s equity by implementing an equity plan and correctly executing the corresponding documents.
Have an equity attorney to turn to
There’s a good chance you’re going to like your startup equity compensation lawyer from LawTrades and want to keep using them. Perfect – now you have a legal expert to turn to when in need.
Confirm your legal compliance
Compensating employees with equity implicates tax and employment / labor laws. Ensure that your company is complying with the law as you deal with equity based compensation.
Can I draft a startup equity compensation agreement on a “do it yourself” website?
You may be able to find a template online but be careful. Those forms have major limitations, largely in that their forms are standardized and may leave out important details specific to your company. Startup employee equity should be coveted by all companies, and using such forms can expose your company and equity to unnecessary risk.
Are there different forms of startup equity compensation?
Yes there are many different types equity compensation for your employees. The most common forms of equity compensation include incentive stock options (“ISO”), nonqualified stock options, phantom stock, and restricted stock units (“RSU”). With so much choice, it’s helpful to review your options with a startup equity compensation lawyer.
Does compensating an employee with equity fulfill minimum wage laws?
Compensating employees only with stock or stock options is generally not considered wages for purposes of minimum wage calculation. Accordingly, this type of arrangement can easily violate minimum wage laws. While there might be ways to structure this type of compensation package, they are very narrowly construed and require robust legal skill. If you are thinking about this option as compensation, engaging an experienced startup equity compensation lawyer is essential in order to avoid fines or legal action, or both, that could impair your company’s brand and value.
Does it make sense for my startup to have an option pool?
Stock options make the most economical sense for more sophisticated startups with a relatively developed staff. Because creating an options program is time intensive and requires highly specialized legal expertise, they are quite costly to implement. Therefore, creating a stock options program for just one employee does not usually justify the cost, but if you are planning to develop a highly skilled staff, then offering options could be the right choice.
I’m an employee – can you review my employer’s proposed equity compensation?
Yes – LawTrades has equity attorneys available to review proposed equity compensation for employees.
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