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:

  1. Decide what type of equity award to issue.
  2. Be discerning in setting up your equity pool and making grants.
  3. Be careful in how you promise equity awards to employees and consultants.
  4. Exercise caution in setting the strike price of an option.
  5. Encourage employees to consult with legal and tax advisors to determine whether it is advisable to file a Section 83(b) election.

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