Startups and emerging growth companies often seek to use forms of equity-based compensation to compensate employees. As an entrepreneur, if your employees are dedicated and driven, your company will have a much higher chance to succeed. It can often be difficult to hire people who are invested in your company’s success and while good, qualified candidates are often inertly driven to succeed, getting them invested in the company as well as their personal careers can give them the extra push they need to go above and beyond.
When you give your employees equity, you simultaneously reward employees for their commitment, align their interests with those of the company, and encourage stellar performance by creating long-term value for their contributions; however, there are important considerations that should be assessed before making a decision to issue equity to an employee.
In order to protect your company, the equity-based compensation is often earned subject to vesting, which essentially means employees earn their equity over time or upon certain milestones. Vesting acts as a protection to ensure that both the employee and the company have aligned goals and encourages the employee to remain involved with the business over a longer period of time in order to obtain additional ownership interest in the company. There are multiple ways to set up vesting so it’s important to document it properly. In addition, if an employee stops providing services to the company, then the company should have the option to repurchase the equity and require the employee to forfeit what has not been vested. Giving your employees equity can be beneficial to your company; however, proper care must be taken to avoid putting your company at risk.
Tricia Meyer is founder + managing attorney of Meyer Law, a woman-owned, forward-thinking boutique law firm specializing in helping entrepreneurs and technology companies from startups to fortune 500’s with corporate, contracts, employment and intellectual property matters in Technology, Telecom, FinTech, EdTech, AdTech, HealthTech, Internet of Things, Financial Services, Telecom, Social Media, Real Estate, Marketing, Advertising and Healthcare sectors. As an entrepreneur and a lawyer, Meyer has a unique perspective and is a mentor at tech incubators and accelerators across the United States. Learn more at www.MeetMeyerLaw.com and follow us on Twitter @Tricia_Meyer or @Meyer_Law.