Relationships between startups and early-stage contributors must be carefully planned.
Today’s innovation-driven marketplace has generated highly skilled employees and consultants who anticipate competitive compensation as a reward for contributing to the growth of a company. As such, maintaining steady business growth while offering attractive incentives to executives and advisors requires considerable financial planning.
Common practice within the startup community is for founders to provide equity incentives in the form of company stock and stock options exercisable for company stock to employees and advisors who significantly contribute to business growth. This is typically accomplished through the creation of an equity incentive pool in which 15% to 20% of the company’s initial capital is reserved for issuance to employees and other early contributors as a means to inspire high performance. The company’s equity is often offered in lieu of more traditional benefits.
Equity in an early stage company often has little or no immediate value, but the opportunity for early contributors to receive substantial rewards through stock appreciation as the company grows is a significant enticement.
The structure of the stock incentive plan and the appropriate vesting schedule is also an important consideration. Stock incentive plans are often structured in a way that allows flexibility in setting terms for vesting, or customization of vesting, for a particular stock grant. It is wise to lay out a course of action prior to structuring your equity incentive plan that includes protocols that should be followed in the event of a change-in-control or acquisition of the business during a time when options or equity incentives are vesting. It is critical that your stock incentive plan is registered or permitted, and it complies with federal and state securities laws. Once registered, the plan allows the issuance of options or stock grants, or at times, appreciation rights in the state in which those options or those securities will be issued.
Startup companies frequently turn to consultants early in their formation. In fact, certain founders often prefer to work with consultants rather than hiring employees to avoid dealing with benefits that are typically required with full-time employees, although there can be risks to this approach. Many emerging companies establish advisory boards comprised of an informal group of people who can make special contributions to the startup. Advisory board members are generally rewarded with equity incentives instead of cash, particularly since most early stage companies do not have a lot of cash to disburse. To define the role of the advisory board, many companies will attempt to establish a structure that clearly specifies the board’s tasks.
Onboarding Your Board of Directors
The board of directors is your company’s “think tank.” Its members provide technical expertise and insight into building a successful startup, as well as guidance on corporate governance matters and introductions to invaluable industry contacts.
A startup company board is usually comprised of trusted contacts, seasoned entrepreneurs and startup veterans who understand the industry and regulatory regime under which the company operates. Board members are legally required to act in the best interest of all shareholders. In exchange for their commitment to the company, they often receive a modest equity grant in the company that vests during the period for which they serve as directors.
Founder Tip: Protect Your Assets
It is imperative that the founders protect proprietary information. Anyone in a position that requires he or she be “in-the-know” about the company’s intellectual property and trade secrets should be required to sign a nondisclosure agreement, an assignment of inventions and a few other documents before any proprietary information is disclosed.