The majority of startups will reward early hires with the company for taking a risk and joining the team by providing them with equity. After all, startups are difficult and come with a myriad of expensive, difficult and mundane issues that you need to be aware of to handle and succeed.
One area that can be quite troublesome is tax and legal issues related to issuing equity to your employees. The way you should issue equity to your earliest employees will depend on a number of factors. In most cases, it is best to consult with a business law attorney to make sure you are structuring everything in a way that keeps the best interest of your employees and business in mind.
Here you can find a few guidelines to keep in mind when you are thinking about how to issue equity to your startup employees.
What are the goals of the company?
Is your company poised for quick growth and an IPO or huge exit? Or, is there a good chance you are going to remain privately owned so you can grow more organically as time passes? This is a consideration that will play an essential role in determining how to issue equity to your workers.
There are several options to provide equity compensation depending on if your company is a S corporation, C corporation or limited liability company. In corporations, equity compensation is most common; however, there are ways LLCs can use this, too.
The liquidity of the shares is closely related to the overall goals of your company. If your company is going to enter IPO or acquisition, you will need to raise outside capital. For a company that is going to grow organically, there is less liquidity.
How is equity issued?
In a corporation, equity is typically provided as restricted stock or stock options. In each situation, the stock is typically restricted from being sold or transferred. Liquidity of this is achieved when the company goes public or is acquired and the employees can then sell the shares and cash in.
With an LLC, there is no type of “stock,” which means you can’t issue company shares the same way you can with a corporation. As a result, you will have to make different arrangements. In most cases, LLC owners will reward their employees by sharing the business’s profits.
The Bottom Line
If you are a startup founder, providing your new hires with equity is an excellent way to motivate them. However, you have to consider the advantages and disadvantages of the different approaches that are available when you are trying to figure out how much equity should be issued. In most cases, using the services of a business law attorney will help you make the right decisions.
Learn more about issuing equity to your employees by contacting the attorneys at the Law Offices of Peter M. Feaman, PA by calling 561-469-0019. Having legal representation can help you make the right decisions.