The Ultimate Guide to Choosing Your Employee Equity Compensation Plan

Did you know that private equity and venture capital compensation is up again this year, taking it to 8 straight years of compensation gains?

You’re looking to give your employees a piece of the company, but you don’t know where to start.

There are a lot of different equity compensation plans out there and it can be difficult to know which one is right for your company.

But don’t worry. Keep reading as we’ve created this guide to help you choose the best employee equity compensation plan for your business.

In this guide, we’ll cover everything from equity types to vesting schedules. We’ll also talk about tax implications and creating a written agreement.

Decide What Type of Equity You Want to Offer

There are two main types of equity compensation: stock options and restricted stock units (RSUs). Stock options give employees the right to purchase shares of company stock at a set price, while RSUs provide employees with actual shares of stock.

Each type of equity compensation has its distinct advantages and disadvantages. For example, stock options tend to be more beneficial when a company is in its early stages of growth.

This is because they allow employees to buy shares at a lower price, which can lead to a higher return on investment if the company’s stock price increases.

However, stock options can also be riskier than RSUs since there’s no guarantee that the stock price will rise.

RSUs, on the other hand, are more advantageous when a company is further along in its development. This is because RSUs provide employees with actual shares of stock, which they will receive regardless of whether the stock price goes up or down.

However, RSUs can also be less profitable than stock options if the company’s stock price doesn’t increase.

Ultimately, it’s important to consider your company’s stage of growth, financial situation, and long-term goals when making your decision.

Choose a Vesting Schedule

Once you’ve decided what type of equity to offer, you need to choose a vesting schedule. Vesting schedules determine when and how employees will receive their equity compensation.

There are two main types of vesting schedules: cliff vesting and graded vesting. Cliff vesting requires employees to work for the company for a certain period before they’re eligible to receive any equity compensation.

Graded vesting allows employees to receive equity compensation over time, typically in annual increments. While cliff vesting is more common, graded vesting may be a better option for companies that want to retain key employees.

With cliff vesting, there’s a risk that employees will leave the company before they’re eligible to receive any equity compensation. This can be especially problematic for companies that are unable to offer competitive salaries.

With graded vesting, employees will start to get equity compensation after a shorter period of time. This can help keep them with the company longer.

Ultimately, the best vesting schedule will depend on the needs of the company and the preferences of its employees. If you’re not sure which option is right for your business, it’s worth consulting with an experienced attorney or HR professional.

Set an Exercise Price

Any company that offers stock options to its employees will need to set an exercise price. This is the price at which employees can purchase shares of company stock. Setting the exercise price is important, as it needs to be fair market value.

This ensures that employees are getting a good deal on the stock, and it also protects the company from any legal issues that might arise. Consultation with a financial advisor or valuation expert is key to setting a fair exercise price.

Once the price is set, employees can begin exercising their options and owning a piece of the company. This can provide a great incentive for employees to stay with the company and help it grow.

Consider Tax Implications

When it comes to equity compensation plans, there are several tax implications that both employees and employers need to be aware of. For employees, equity compensation can come in the form of stock options, and restricted stock units.

While these plans can provide a valuable source of income, they can also lead to significant tax liability. As such, it is important to consult with a tax advisor to ensure that your equity compensation plan is compliant with all applicable laws.

For employers, equity compensation plans can also have tax implications. In particular, employer-sponsored stock option plans may be subject to the rules and regulations of the Securities and Exchange Commission (SEC).

As such, employers need to ensure that their equity compensation plans comply with all applicable laws and regulations. failure to do so could result in significant penalties.

Create a Written Agreement

Once you’ve decided on the details of your equity compensation plan, it’s important to create a written agreement. This agreement should outline the terms and conditions of the plan, as well as the rights and responsibilities of both employees and employers.

A well-written employee benefit plan agreement will help to avoid misunderstandings and disputes down the road.

Ready to Choose an Equity Compensation Plan for Your Employees?

Equity compensation is a critical part of attracting and retaining employees. By understanding the different types of equity compensation plans available, you can choose the right plan for your company and employees.

Check out our blog for more articles like this one that will help you make decisions about your business and your employee benefits package. Thanks for reading!