Issuing Equity to Employees in Exchange for Compensation in a Startup
Provided by HG.org
Equity may be issued to employees as a form of compensation when a startup company is initially opening for business. The shares, stock or interest may be passed to these workers, but to do so, the owner should understand fully how this could affect him or her and the business both in the startup phase and later when the equity means more.
When a company is first starting out, employees may be offered equity through stock or interests in the business as a means of extra compensation when money may be tight. This encourages loyalty and may cause others outside the organization to seek employment from the owner. When this process is completed correctly and there is a strategy involved, it may be possible for equity being issued to have numerous benefits for both the employee and the company. This could cause negative consequences as well, and this means that the owner or partners should ensure tax, legal and accounting matters are clear of complications and other concerns are resolved as quickly as possible.
Many startups that issue equity to employees in the initial stages are generally small, privately held or limited liability companies that have few owners or partners. This keeps the issue contained to only so many persons, but if the business expands and becomes profitable, the equity may be worth more than workers are aware that is possible. By conserving cash through offering stock, interest or shares, the owner is able to funnel the funds into other matters that could be essential to increasing or starting revenue streams. The advertised equity may also attract talented and skilled workers to the company at the beginning and lead to better business opportunities later.
Types of Equity
Employees are provided various types of equity based on what the owner feels is necessary and how much he or she is willing to give when starting his or her new company. When there are provisions for it, stock could be the equity that employees receive. These may be sold or retained, and if the business becomes public, the stock may be worth more at a later date. If the organization runs on shares, these are often used as a piece of ownership in the company. This means that employees may become minor shareholders. Others are given interest that may be either, both or something else such as certificates for bonuses at a later time. Typically, equity means a portion of control or funds that may be cashed out at some point.
The Incentive of Equity
When the owner has decided to provide equity to employees, he or she has determined that instead of bonuses or a great deal of money for wages, the funds may be funneled into projects or marketing. In doing this, many workers are given an opportunity to become more to the company if they stay. Some individuals may later turn into shareholders, or these persons could rise into partners. The potential is greater when more equity is accrued early. This could mean even more if the business is small at first and then turns into a corporation. Then, someone with a larger portion of equity may have a deciding vote in how things are run.
Issuing equity to employees is often something that attracts others from companies where they are not happy. Given the opportunity to accrue what could amount to a greater bonus is attractive. However, the practices of the business are what may keep these persons and earn loyalty. If the business is able to thrive and push through the initial stages so that it becomes an actual company worth staying in the market, these employees may remain and work hard for the bonuses of equity. This means that while they are brought in for the shares, stock or interest, they stay with the owner when he or she has a clear defined plan and treats them right.
Legal Aspects of Equity to Employees
The drawback of giving equity to employees is that eventually, this means they are provided with a portion of control or ownership in the organization. When cash is strapped, the owner may not have many choices, but as long as he or she is willing to part with a percentage of ownership, then this may be the perfect choice to ensure employees are taken care of and given the incentives to remain. It is important to have a lawyer on hand to ensure these activities are legal and valid for both the owner and employees.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.