Starting a new business is a risk for both the ownership group and potential employees. It may be difficult to ask for a commitment from employees when there is no guarantee their jobs will be there long term. One way to provide an incentive for high performing talent is to issue equity, or ownership, in the company. Here are some items to think about how to give employees equity in a start-up.
What’s Your Business’ Exit Strategy?
Depending on what your exit strategy is, you may want to use different strategies for issuing equity. For example, if your company is fit for fast growth and a sale within three or four years, issuing equity that accrues over longer periods of time wouldn’t be attractive to a prospective employee. However, if you plan on letting your business grow organically over the course of 10 to 20 years, that option may be attractive.
Issuing stock to your employees may sound easy, but it can get very complicated depending on your unique circumstances.
Company Structure Influences Equity Strategy
The way you set up your company’s legal structure plays a huge part in how you issue equity. If your business is a C or S corporation, you can issue stock options or restricted stock. The way employees cash out is through company acquisition or when the company goes public- also referred to as an Initial Public Offering or IPO.
Limited Liability Companies (LLCs) are a very common business structure, however, they cannot issue stock. Instead, many LLC’s engage in profit sharing, allowing employees to share in the company’s profits as it continues to grow. This is a good way to motivate your workforce as their hard work literally pays off for them in a tangible result.
Think About Your Equity Pool
An equity pool is the amount of equity your leadership team would be willing to provide employees in an equity arrangement. Neglecting this step may put you in a situation where you are hiring too many people and giving away a larger chunk of your business that you had originally planned.
The more people that you employ, the bigger your equity pool will be. Develop a hiring plan from senior hires down to the lowest level of employee. Plan out exactly how much each level will receive and how much that equity share could grow over the years. Senior hires will typically be issued more stock than a junior employee so take that into consideration.
Trust in a Business Attorney for Guidance
Issuing stock to your employees may sound easy, but it can get very complicated depending on your unique circumstances. Have a plan, but always seek the guidance of an experienced attorney with a full understanding of your business goals. Contact The Law Offices of Cipparone and Cipparone if you want to create an employee equity plan for your business.
**This blog is for general informational purposes only. Cipparone & Cipparone, P.A. does not distribute legal advice through this blog. As such, this blog does not constitute legal or other professional advice and no attorney-client relationship is created between the reader and Cipparone & Cipparone, P.A.