performensation top 11 considerations for start-up equity compensation
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P R I V A T E C O M P A N Y C O M P E N S A T I O N
TOP 11 CONSIDERATIONS FOR EQUITY COMPENSATION
Rolling out an equity compensa2on plan requires an understanding of SEC, tax and accoun2ng rules in conjunc2on with human capital and engagement prac2ces. It is a complex process that should be evaluated carefully before deciding to go at it alone. Considera2ons for these plans include:
1. Percent of company value to dedicate to equity compensa5on. The amount of ownership that you are willing to dedicate to employee equity.
2. Exit / Liquidity event. These are poten2al mone2za2on events that will allow employees to extract money from their equity. Among these are: IPO, acquisi2on, merger, purchase, secondary market and the internal (company-‐controlled) market.
3. Laws for issuance and taxes. Considera2on of the states and countries where your employees reside. Many states and nearly all countries have their own securi2es rules. There are also tax and accoun2ng rules to consider.
4. Impact on dilu5on. Equity compensa2on must account for dilu2on of shareholders and/or the value of your company.
5. Company valua5on. There must a be a process for valuing your company and its underlying stock. This is required under IRC 409A and oUen requires an outside valua2on professional.
6. Policies. Termina2on (voluntary or not), change in control, re2rement and leaves of absence.
7. Ownership. When should you allow for employees to become actual owners of stock and how will that ownership impact your company? For example, >499 shareholders in a C-‐Corp generally results in required SEC filings, or significant legal work to a]empt an exemp2on. Each new shareholder means one more person with vo2ng privileges and a poten2al addi2onal mee2ng a]endee. Shareholders have far more rights than holders of unexercised op2ons.
8. Equity instruments to be used. Stock op2ons are good, but not always right for every company. There are many reasons to consider Restricted Stock Shares and Units, Stock Apprecia2on Rights, Phantom Stock, Performance Units and more.
9. Ves5ng schedule and exercisability. Historical ves2ng periods are 4-‐5 years for stock op2ons and 2-‐4 years for restricted stock shares or units. The correct ves2ng schedules for your company may not be as simple as this and may have more than one standard schedule. Awards may also allow for more frequent ves2ng once the employee reaches a specific 2me threshold (generally one year).
10. Informa5on sharing. How much are you willing to share with employees and how will they perceive value in their equity compensa2on given the amount of informa2on provided?
11. Grant size. How much should each individual be granted? How much of the company are you willing to give one individual? How much are you willing to give right now? What expecta2ons does that set for the future? How frequently will you grant op2ons?
Equity compensa2on should not be a “do-‐it-‐yourself” project. Get professional help with: A) philosophy and design B) legal and compliance C) accoun2ng and taxa2on and D) communica2on and implementa2on. Like many things in life, equity compensa2on is easy to do wrong and hard to do right.
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