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:
- The Basics
- Stock Options
- How Are Stock Options Taxed, and Which Are Better, Incentive Stock Options or Nonstatutory Stock Options?
- Restricted Stock Awards
- Stock Bonus Awards
- Restricted Stock Units
- When Would A Company Use Stock Awards Instead of Stock Options?
- Q&A on Section 409A Valuations
- Post-Employment Exercise Periods for Stock Options
- Early Exercise Stock Options
- What Is a Vested Share Repurchase Right, and Why Does It Matter?
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.
Stock options are the most common form of equity incentive for early-stage startups. A stock option grants the option holder the right to purchase a specific number of shares of the company within a fixed period of time at a preset “exercise” price, generally following the satisfaction…
The Human Capitalist Series P.3: How Are Stock Options Taxed, and Which Are Better, Incentive Stock Options or Nonstatutory Stock Options?
The U.S. federal taxation of stock options for U.S. taxpayers depends on whether the options are classified as incentive stock options (ISOs) or nonstatutory stock options (NSOs). Incentive Stock Options (ISOs) ISOs may provide a tax advantage to the holder if (i) the optionee does not sell…
A stock purchase award (also known simply as “restricted stock”) is the sale of a share of stock in exchange for an actual cash payment (or transfer of property with a fair market value that equals the purchase price and which property is not already the company’s).…