Offering Employee Equity

equity
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March 15th, 2020
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You’re the founder of a startup and cash flow is tight. Yet you need to attract talent into the fold and find a way to retain good employees during the bumps along the way. What’s an entrepreneur to do?

One option is to offer employee equity in the company. Equity is non-cash compensation that represents ownership in the organization. It can be in the form of options, restricted stock, and performance shares to name a few.

There are pros and cons to going this route. And if you do, there will be a maze of tax, legal, accounting, and personnel issues to navigate. Let’s look at the basics to help you decide.

The Upsides
Key benefits of offering your employees the opportunity to own a share of your startup’s equity include:

  • Allowing you to conserve cash for other expenses.
  • Attracting top talent: You may not have a budget to hire a dream team, but equity can be the difference-maker in a competitive hiring market.
  • Creating an ownership mentality: Employees with equity work 8 hours more per week on average than those without equity, according to findings from Danske Bank.
  • Helping foster loyalty: Create a company culture that believes, “The Company does better if we all do better, and if we all do better, we will all (literally) profit.”
  • Helping to reduce turnover: A program that has the right kind of vesting schedule—where employees have incentive to stay or get nothing if they leave before one year—keeps employees interested in a long-term tenure.

The Downsides
The main disadvantages are:

  • You will be required to give up some ownership of your business.
  • Compensation is more complicated than a traditional cash-based salary.
  • There is the risk that without careful planning, you could end up giving away a large chunk of ownership.
  • Down the road, if you want to sell the business, some buyers may not be interested unless they can acquire 100% of the stock.
  • The tax and legal issues are complex.

Is there another way to improve cash flow?
Truth be told, if cash flow is an issue, maybe it’s time to have an in-depth conversation with your accountant about options outside of employee equity. There are common financial challenges every small business faces that create funding shortfalls. Or maybe you are dealing with a unique situation and need a financial strategy to get out from under it. My advice is: Don’t wait to reach out. Talk to a financial professional right away.

The bottom line is: If you are comfortable with offering employees equity, you’ll want to structure a package with the help of legal and accounting professionals. Let’s have a conversation about your company to map out the best path forward.

 

Additional Sources:
How Employee Equity Works: A Simple Introduction
Startup Employee Equity 101 – How to Give Equity to Your Team?

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