What You Need to Know Before Offering Equity Compensation

Equity Compensation

To attract the best-qualified employees, your benefits package needs to be competitive. When your company is in a start-up or growth stage, equity compensation can be an attractive option. 

With equity compensation, your employee can benefit as your company grows.

Types of Equity Compensation

Equity compensation refers to a number of ways to offer a financial stake in your company. The possibility of future monetary rewards can motivate employees to contribute their best efforts in meeting and exceeding rewards. When the company succeeds, those with equity compensation can be rewarded.

Types of equity compensation include stock options, share unit plans, and stock purchase plans. In a stock option plan, the employee may purchase stocks, usually at a discounted or fixed price. Often, the employee must wait a period of time, known as being “vested” in the plan. Other rules or restrictions may also apply.

How to Offer Equity

You may offer equity compensation either before or after your company’s initial public offering on the stock market (IPO). Your company will need the right business structure, however. A C-corp is the best option if you want to offer equity compensation to employees.

You will need to decide how much equity you wish to make available to your employees, both as an entirety and on an individual basis. It’s common for options to be more generous for higher-level employees. You will also need to decide on the price valuation and the vesting period.

What to Consider Before Offering Equity Compensation

For business owners, offering equity compensation can have advantages and disadvantages. This benefit can attract and retain top talent who hope to reap the rewards of their hard work. It also can provide tax benefits for both companies and shareholders.

However, by offering stock, you are sharing the ownership of your company with others. That means you could have to share decision-making with shareholders someday. Additionally, the process of managing equity compensation is quite complex, involving legal intricacies and tax considerations.

You have much to learn before offering equity compensation as part of your total benefits package, but it can be a great choice. This is true especially if your business is small but experiencing rapid growth. You will need the most qualified workers to push you to the next level, and the promise of ownership in a profitable business can incentivize employees to commit to their best efforts.

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