equity incentive plan

An equity incentive plan allows a company to provide equity to employees.  There are several ways to do this.  Companies can grant equity outright, they can grant vested equity, or they can grant vested equity options.  Providing equity to employees has been shown to increase morale and performance.  For most startups that want to grow beyond a small scale, granting some form of equity to key members of the team will become necessary.

LLCs

The most common way to grant equity to employees is via stock options.  However, LLCs cannot grant Incentive Stock Options.  Early Stage Legal has created a stock option program for LLCs but the options are treated and taxed like Nonstatutory Options not Incentive Stock Options.  This program must be built into the LLCs legal documents.  Early Stage Legal provides users with all of these options as part of its standard LLC formation process.  LLCs grant equity in the form of membership units. The folllowing components of an equity incentive program are available:

  • Membership Unit Equity Pool--this is a pool of equity that can be established and reserved for assignment to key members of the team who have not yet joined, or to members of the team that should be vested.
  • Vested Equity--it is possible to vest the membership unit assignments to key members of the team
  • Vesting Triggers--it is possible to set up "triggers" that accelerate vesting

S-Corporations

S-Corporations grant equity in the form of stock.   Equity Incentive Programs are available to S-Corporations.  Early Stage Legal provides users with all of these options as part of its standard S-Corporation formation process.  The folllowing components of an equity incentive program are available:

  • Stock Option Pool--this is a pool of equity that can be established and reserved for assignment to key members of the team who have not yet joined, or to members of the team that should be vested.  See the section below on Stock Options for more information.
  • Vested Equity--it is possible to vest the membership unit assignments to key members of the team
  • Vesting Triggers--it is possible to set up "triggers" that accelerate vesting

C-Corporations

C-Corporations grant equity in the form of stock.   Equity Incentive Programs are available to C-Corporations.  Early Stage Legal provides users with all of these options as part of its standard C-Corporation formation process.  The folllowing components of an equity incentive program are available:

  • Stock Option Pool--this is a pool of equity that can be established and reserved for assignment to key members of the team who have not yet joined, or to members of the team that should be vested.  See the section below on Stock Options for more information.
  • Vested Equity--it is possible to vest the membership unit assignments to key members of the team
  • Vesting Triggers--it is possible to set up "triggers" that accelerate vesting

Stock Options

Stock options give the right to the employee to purchase company stock at some future date.  For the more technically inclined, employee stock options are call options where the underlying asset is the stock of the employing company.  Because call options are less expensive to purchase than actual stock and because early-stage companies are often worth far less when they are new than they will be when they "grow up," stock options can be a relatively inexpensive way for the company to incent employees.  From the employees perspective, stock options are inexpensive and can create significant wealth if the company is successful.  This creates a powerful incentive for those employees with stock options to work hard to ensure that the new company is successful.  Because most stock options are vested, it also provides a powerful retention tool for employees.  Learn more about Employee Stock Options.

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