Top 11 things for Private companies to consider before using stock options and equity comp

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Top 11 things that every private company (and some public companies) need to consider when creating stock option and equity compensation plans for start-ups and small companies.

This document provides a quick overview of some of the most important things to be included in any project plan to create an equity compensation plan or share scheme.

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Top 11 things for Private companies to consider before using stock options and equity comp

  1. 1. Rolling  out  an  equity  compensa2on  plan  requires  an  understanding  of  SEC,  tax  and  accoun2ng  rules  in   conjunc2on  with  human  capital  and  engagement  prac2ces.  It  is  a  complex  process  that  should  be  evaluated   carefully  before  deciding  to  go  at  it  alone.  Considera2ons  for  these  plans  include: 1. Percent  of  company  value  to  dedicate  to  equity  compensa5on.  The  amount  of  ownership  that  you  are   willing  to  dedicate  to  employee  equity. 2. Exit  /  Liquidity  event.  These  are  poten2al  mone2za2on  events  that  will  allow  employees  to  extract  money   from  their  equity.  Among  these  are:  IPO,  acquisi2on,  merger,  purchase,  secondary  market  and  the  internal   (company-­‐controlled)  market. 3. Laws  for  issuance  and  taxes.  Considera2on  of  the  states  and  countries  where  your  employees  reside.  Many   states  and  nearly  all  countries  have  their  own  securi2es  rules.  There  are  also  tax  and  accoun2ng  rules  to   consider. 4. Impact  on  dilu5on.  Equity  compensa2on  must  account  for  dilu2on  of  shareholders  and/or  the  value  of  your   company. 5. Company  valua5on.  There  must  a  be  a  process  for  valuing  your  company  and  its  underlying  stock.  This  is   required  under  IRC  409A  and  oUen  requires  an  outside  valua2on  professional. 6. Policies.  Termina2on  (voluntary  or  not),  change  in  control,  re2rement  and  leaves  of  absence. 7. Ownership.    When  should  you  allow  for  employees  to  become  actual  owners  of  stock  and  how  will  that   ownership  impact  your  company?  For  example,  >499  shareholders  in  a  C-­‐Corp  generally  results  in  required   SEC  filings,  or  significant  legal  work  to  a]empt  an  exemp2on.  Each  new  shareholder  means  one  more   person  with  vo2ng  privileges  and  a  poten2al  addi2onal  mee2ng  a]endee.  Shareholders  have  far  more   rights  than  holders  of  unexercised  op2ons. 8. Equity  instruments  to  be  used.  Stock  op2ons  are  good,  but  not  always  right  for  every  company.  There  are   many  reasons  to  consider  Restricted  Stock  Shares  and  Units,  Stock  Apprecia2on  Rights,  Phantom  Stock,   Performance  Units  and  more. 9. Ves5ng  schedule  and  exercisability.  Historical  ves2ng  periods  are  4-­‐5  years  for  stock  op2ons  and  2-­‐4  years   for  restricted  stock  shares  or  units.  The  correct  ves2ng  schedules  for  your  company  may  not  be  as  simple  as   this  and  may  have  more  than  one  standard  schedule.  Awards  may  also  allow  for  more  frequent  ves2ng  once   the  employee  reaches  a  specific  2me  threshold  (generally  one  year). 10. Informa5on  sharing.  How  much  are  you  willing  to  share  with  employees  and  how  will  they  perceive  value  in   their  equity  compensa2on  given  the  amount  of  informa2on  provided? 11. Grant  size.  How  much  should  each  individual  be  granted?  How  much  of  the  company  are  you  willing  to  give   one  individual?  How  much  are  you  willing  to  give  right  now?  What  expecta2ons  does  that  set  for  the   future?  How  frequently  will  you  grant  op2ons? Like  many  things  in  life,  equity  compensa2on  is  easy  to  do  wrong  and  hard  to  do  right.  Equity  compensa2on   should  not  be  a  “do-­‐it-­‐yourself”  project. ©2016  Performensa2on Toll  free  877-­‐803-­‐9255  |  Direct  415-­‐625-­‐3406 email:  info@performensa2on.com web:  www.performensa2on.com TOP 11 CONSIDERATIONS FOR EQUITY COMPENSATION P R I V A T E C O M P A N Y C O M P E N S A T I O N Philosophy and Design | Legal and Compliance | Accounting and Taxation | Communication and Implementation

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