Equity Compensation

The Human Capitalist Series P.1: The Basics

We’re excited to introduce a multipart and ongoing series about the basics of (and some advanced topics related to) equity for startup employees and contractors. The “Human Capital” aspect of any enterprise, especially a technology company, is its most valuable asset, and we hope to highlight the importance of human capital in this series.

Please click on the links below to learn more about the initial topics in this series:

If you have questions on any of these posts, please contact a Perkins Coie team member.

What are equity awards?

“Equity” is another way of referring to the ownership of a company, which is often in the form of stock, but it includes rights to acquire stock as well. There are several different types of employee equity used by U.S. C-corps: stock options, restricted stock awards, stock bonus awards, and restricted stock units (RSUs). We’ll discuss employee equity in LLCs and partnerships in a separate post.

Providing employees and other service providers with equity is a very common way for a startup to incentivize its talent and align its interests with the stockholders of the company. Just as with the issuance of any securities to investors, the company’s board generally must approve the issuance of any equity grants.

Can I pay my employees solely with equity?

No. Under state and federal wage-and-hour laws, employers generally must pay base salaries in cash and comply with all minimum wage-and-hour, withholding, and other applicable laws regarding employees.

How much equity should I issue to employees and contractors?

There are no one-size-fits-all rules for deciding how much equity to issue to your employees and service providers, since it will depend on each person’s seniority, experience, role in the company, and negotiating position. It also depends on investors’ appetite for equity compensation. That said, here are some common ranges for early-stage startups to consider as a starting point for non-founder employees:

Early engineers                  0.5 – 2%

C-suite                              1 – 10%

Advisors                           0.1 – 0.5%

Your outside counsel (including Perkins Coie) can often work with you to benchmark employee equity and cash compensation.

How to Prepare for an Equity Financing

We have covered in past FTTWs how to value your startup and how much capital to raise. Once your startup decides to pursue equity financing, you should start to prepare for the investor due diligence process. On the business side, you will need to prepare a business plan and should take steps such as obtaining management references, interviews and background reviews, customer/user references, technical/product reviews, financial statements and business model reviews.

What Every Startup Needs to Know

On Wednesday, June 26th, Perkins Coie’s Palo Alto office hosted the startupPerColator event, “What Every Startup Needs to Know.” Lowell Ness, a Perkins Coie partner in the Emerging Companies & Venture Capital (ECVC) practice, moderated a panel which included Herb Stephens of NueHealth, Thomas Huot of VantagePoint Capital, Jennifer Jones of Jennifer Jones and Partners, Yuri Rabinovich of Start-up Monthly, and Olga Rodstein of Shutterfly.