When it comes to rewarding employees with equity, there are a few things you need to take into consideration. At The Chawla Law Firm, PLLC, we are a Houston-based law firm with a focus in business law. In this blog post, we will be discussing our guide to rewarding employees with equity. If you're looking for a comprehensive guide on the topic, you've come to the right place! Keep reading to learn more and reach out to our team today for all of your equity compensation needs!
A Guide to Rewarding Employees With Equity
What Is Equity?
In business, equity is the ownership stake in a company. It represents the value that would be left for shareholders if a company was to liquidate today. For employees, being rewarded with equity means that they are given a certain number of shares (or membership interests) in the company.
How Do Equity Awards Work?
Equity awards also known as equity compensation awards are typically granted to key personnel or management (e.g., executives, directors, and sometimes other employees and service providers). Those in high-level positions like top executives and directors typically hold a larger portion of the total compensation. If you wish to grant a similar reward, such as dividend equivalents, without actually giving up equity, schedule a call to discuss alternative options such as phantom stock.
What Can Equity Awards Do?
When it comes to equity awards, they are a popular way to reward employees. They can first be used to either attract or retain talent or other service providers. Equity awards also serve as a great way to incentivize employee or service provider performance. They help to align the interests of the company's top executives or directors with the interests of the company's shareholders. Lastly, they are used to help motivate directors to oversee and protect their company's long-term goals and business plans.
How Do I Design an Equity Compensation Program?
If you're looking to design an equity compensation program, there are a few things you need to take into consideration. The first is what kind of company do you have? While part of the evaluation is whether you are a startup or a more established business, company-type plays a key determinative factor. The answer to this question will help determine the type of equity compensation program that would work best for your company. For example:
C-corporation and S-corporations - Stock options can be granted to employees and can qualify as incentive Stock Options (ISOs). Other common forms of equity compensation include Stock Appreciation Rights (SARs), Restricted Stock, Restricted Stock Units (RSUs), and Performance Awards.
LLCs and LPs - Profit Interests or non-qualified options (to acquire membership/partnership interest) can be granted to employees. ISOs are not available for LLCs or LPs. Other equity compensation arrangements (such as RSUs) can be replicated in the LLC context but are uncommon.
The second thing you need to consider is what are your company's goals? What are you looking to achieve with this program? Tax considerations are critical and structuring your entity for preferential tax treatment is important. The third and final thing you need to take into consideration is your budget for this program? Another thing to consider when creating your equity compensation program is the legal implications of granting equity awards and navigating across pertinent laws (for example, employee vs partner implications, SEC compliance, ERISA, 409A etc.).
Lastly, you need to determine what type of equity award fits with the company's overall compensation strategy. Once you have answers to these questions, you can start to design an equity compensation program that will work best for your company.
About The Chawla Law Firm, PLLC
At The Chawla Law Firm, PLLC, we are a boutique business law firm dedicated to representing and counseling business owners, middle-market companies, and private equity funds in business organizations, corporate governance, acquisitions, dispositions, and joint ventures. We also are committed to providing portfolio companies with transactional, litigation, and corporate counsel support to help meet their day-to-day needs. Reach out to us to learn more about us and how we can help your company today!
We hope this helped you learn more about rewarding employees with equity. So when it's time to add equity compensation, The Chawla Law Firm, PLLC is here to help. As your local business law firm in Houston, TX, our team has experience helping clients navigate equity compensation and is focused on providing the best possible customer care. In addition to equity compensation services, we also provide a variety of legal services that your company may need. If you have any questions, reach out today to our team for all your equity compensation needs!