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.
How to Classify Employees as Exempt or Nonexempt
When hiring employees, a company should ensure it is complying with applicable federal, state, and local laws regarding employee minimum wages, withholdings, and other applicable requirements. To ensure compliance, employers must first determine whether an employee is “exempt” or “nonexempt.” Nonexempt employees are entitled, among other things, […]
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.