If you’re already convinced that equity compensation is right for you, then book a free consultation. Our people will take you through the entire design and implementation process Employee equity compensation comes in a wide variety of forms and plans \u2013 stock options, restricted stock units (RSU), employee share schemes and more. This post will discuss the following 5 types.<\/p>\n\n\n\n Equity compensation works by offering employees equity right away when they join the company or offering them a form where employees have to stay with the company for a certain amount of time to have full ownership of the stock. Let\u2019s see how the following types of equity-based compensation work:<\/p>\n\n\n\n Share options provide an employee with the right to purchase a certain number of shares at an initially agreed price after vesting (service-based or performance-based or both). Fewer taxes are (often) due for an ISO because no taxes are owed at the time of exercise while taxes are chargeable at exercise for NSOs.<\/p>\n\n\n\n Financing methods:<\/u><\/strong> Suitable for<\/u><\/strong> many companies \u2013 early stage, high growth startups and publicly traded companies \u2013 who want to issue equity broadly or with a group of selected employees as a way to attract, retain, and\/or motivate them.<\/p>\n\n\n\n Learn more about share options<\/u><\/a> here.<\/p>\n\n\n\n Restricted stock is a grant of shares to an employee. He\/she can receive them only if a vesting requirement is met (service-based or performance-based or both). Participants may need to pay for the grants under RSA plans while they typically receive the grants for free under RSU plans.<\/p>\n\n\n\n Financing methods:<\/u><\/strong> Suitable for<\/u><\/strong> many companies who want to offer equity broadly or with a group of selected employees as a way to attract, retain, and\/or motivate them without requiring payment upfront. (RSA is commonly used by startups while RSU is by established companies)<\/p>\n\n\n\n Learn more about restricted stock (RSU & RSA)<\/u><\/a> here<\/p>\n\n\n\n They\u2019re the two types of stock plans that don\u2019t really use stock but still reward employees with compensation that is tied to the company\u2019s stock performance. So, participants are not shareholders and don\u2019t have voting rights.<\/p>\n\n\n\n Once the vesting period is over, participants can get a cash equivalent or the actual stock. If you\u2019re looking to offer plans with minimal risks for employees, they\u2019re ideal because there is no purchase required, unlike stock options.<\/p>\n\n\n\n Suitable for<\/u> <\/strong>many companies who want to offer employees compensation without requiring employees\u2019 upfront payment and issuing a large number of extra shares.<\/p>\n\n\n\n Learn more about deferred bonuses<\/u><\/a> here<\/p>\n\n\n\n There’re 4 HM Revenue and Customs (HMRC) approved tax-advantaged share schemes in the UK. They’re Enterprise Management Incentive (EMI), Company Share Option Plan (CSOP), Save as you Earn (SAYE), and Share Incentive Plan (SIP)<\/p>\n\n\n\n Financing methods:<\/u><\/b> Suitable for<\/u> <\/b>many companies who want to offer employees equity with tax benefits while enjoying corporation tax relief themselves. EMI is ideal for small<\/p>\n\n\n\n Learn more about employee share schemes<\/u><\/a> here<\/p>\n\n\n\n Startups typically create employee equity plans that comprise 10\u201320% of the total equity of the company (50% for the founder(s) and 30-40% for investors). It\u2019s similar to what David Steinberg \u2013 the founder of Zeta International, a strategic marketing company \u2013 recommended to us:<\/p>\n\n\n\n Steinberg recommends establishing a pool of about 10% for early key hires and 10% for future employees.<\/p>\n\n\n\n Let\u2019s do some maths here now:<\/p>\n\n\n\n Generally speaking, if a startup business has a team of 10 people, the average equity given to employees is 1-2%. It\u2019s not uncommon for first hires to get a greater equity share.<\/p>\n\n\n\n We get that the working relationship between you and your employee can turn sour. That\u2019s when a shareholder agreement comes into play.<\/p>\n\n\n\n The agreement should spell out the triggers, timing and price for the repurchase of an employee\u2019s stock. Let\u2019s see some typical treatments when an employee leaves the company:<\/p>\n\n\n\n Share Options:<\/strong> Typically, share options expire within 90 days of leaving the company, so you could lose them if you don\u2019t exercise your options. You may have a chance to exercise (i.e. purchase) them within the period or before you leave.<\/p>\n\n\n\n RSA \/ RSU:<\/strong> If your employees quit with vested RSA\/RSU, typically the vested RSUs will stay theirs as they own company shares after vesting. Unvested RSA shares are subjected to repurchase upon termination and the unvested RSU shares are likely forfeited.<\/p>\n\n\n\n
Contact Us <\/a><\/p>\n\n\n\nTypes of employee equity<\/b><\/h2>\n\n\n\n
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How does equity compensation work?<\/b><\/h2>\n\n\n\n
1. Share options \u2013 ISOs & NSOs:<\/b><\/h3>\n\n\n\n
1. Cash from the employee\u2019s pocket to purchase the options
2. Money made from the sale to cover the exercise costs in an exercise-and-sell-transaction<\/p>\n\n\n\n2. Restricted stock \u2013 RSU & RSA:<\/b><\/h3>\n\n\n\n
1. Cash from the employee\u2019s pocket to purchase the grants
2. Stock from the company\u2019s equity incentive pool<\/p>\n\n\n\n3. (Cash) deferred bonus plans \u2013 SARs & Phantom stock:<\/b><\/h3>\n\n\n\n
4. Employee share schemes:<\/b><\/h3>\n\n\n\n
1. Employee’s income
2. Stock from the company’s equity incentive pool<\/p>\n\n\n\nHow much equity to give employees?<\/b><\/h2>\n\n\n\n
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What happens to employee equity on termination<\/b><\/h2>\n\n\n\n