Equity compensation – which links the self-interests of a company’s service providers with the interests of the company and its investors – is a compelling incentive for start-up companies to attract and motivate employees and consultants. Many of these employees and consultants understand and expect that equity or phantom equity arrangements will make up a larger portion of their overall compensation than employees at more mature companies. There are a host of considerations involved in designing and granting awards under an equity incentive plan, and here are five important ones:
- Decide what type of equity award to issue.
- Be discerning in setting up your equity pool and making grants.
- Be careful in how you promise equity awards to employees and consultants.
- Exercise caution in setting the strike price of an option.
- Encourage employees to consult with legal and tax advisors to determine whether it is advisable to file a Section 83(b) election.