A contract for equity provides a powerful path to business success while preserving cash assets.
Sometimes called an employee equity agreement, these contracts allow you to compensate employees—all or in part—by conveying an equity share in your business.
Typically, employees will earn part of their compensation through a traditional salary. The rest is paid in increasing ownership shares in your business.
A contract for equity in your company is a great way to allow your business to put its cash to work in other ways while equity employees work harder to ensure company success.
Your company can put its cash to work in other ways while equity employees work harder to ensure company success.
A business employment lawyer can discuss the best way to use contracts for equity to help grow your business.
What Is a Contract for Equity in a Business?
A contract for equity in a company is a type of employment agreement that allows employees to earn a share of ownership in your company.
Typically, employers use equity agreements in addition to traditional compensation. Equity stake employees will earn a portion of their compensation through a salary or hourly wage.
Workers will earn the balance of their compensation through an incremental stake of company ownership. Although you can explore the potential of paying employees purely in equity, most will require some financial compensation as well.
You can also use an equity-for-services agreement with independent contractors. However, many businesses prefer to apply this useful tool to their own in-house employees.
How Can You Use an Employee Equity Agreement to Grow Your Business?
Small businesses and start-ups rarely have an excess of cash at their disposal. Consequently, you might lack the financial resources to hire and retain top talent.
If you have a lucrative concept and a persuasive pitch, you can use these assets to lure in the employees you need for success. When savvy employees recognize the potential you have to offer, they will be eager to grab a ground-floor stake.
Another key advantage of using equity compensation agreements is the engagement these arrangements generate. When you bring someone on board in exchange for a share of the company, that employee essentially becomes an owner.
With an ownership interest, employees understand they’re working for the success of their own future. You can’t generate this level of engagement with traditional salaried or hourly employment arrangements.
Why Potential Employees Will Value a Contract for Equity in a Company
Today’s employees recognize the value they can contribute to their employer. At the same time, they can feel resentment when their hard work goes exclusively to the benefit of someone else.
One of the most talented and fastest-growing segments of today’s workforce are millennials. This demographic grew up on success stories like Mark Zuckerberg and Facebook.
Facebook used contracts for equity in the early stages of its start-up. After Facebook’s IPO, those ground-floor employees enjoyed the fruits of their labor and a very valuable ownership interest.
Business owners can use contracts for equity to court their industry’s top talent for positions throughout the company. In the case of Facebook and Google, company founders brought in executives and high-level managers they couldn’t otherwise afford, using equity as compensation.
What Forms of Equity Can You Offer Potential Employees?
Your business structure will dictate the details of your employee equity compensation agreement.
The most common forms of equity you can offer potential employees include:
- Granted shares of stock,
- Stock options, and
- Stock warrants.
Structuring your equity offering requires careful consideration. You must carefully oversee the administration of your program also. As employees become vested over time, both you and the employee must file various tax documents. You and your employees could also incur unexpected costs.
Talk to a business employment lawyer who has experience in these matters to ensure everyone clearly understands the program. Setting expectations in advance will help ensure smooth sailing as your company begins to grow and expand.
What Does a Contract For Equity in a Company Look Like?
An equity compensation agreement has three important components. First, it specifies a number of shares to be granted. Next, it tells the employee the vesting schedule for those shares. Finally, it sets forth any restrictions on when or how their equity in the company can be sold. A contract for equity will also set out how much information the company shares with employees who are given equity. Often, an employee will need to sign a non-disclosure agreement or more comprehensive restrictive covenants before equity can be granted.
Components of an Employee Equity Agreement
Key components to include in a contract for equity in a company include:
- Employment: State the terms and conditions of employment that will result in a grant of equity to the employee;
- Duties: Be clear about the employee’s responsibilities;
- Compensation: Specify what portion of compensation is in cash and what portion will be in equity. Be sure to outline any planned changes between these percentages over time;
- Employee Benefits: Outline any benefits that the employee will receive or be eligible for during their employment;
- Termination: State the conditions for termination of employment and the agreement;
- Confidential Information: Specify what qualifies as confidential information and state how you want to protect it;
- Survival: Specify which terms survive the agreement;
- Arbitration: Decide if you want to include an arbitration clause or if you would like to proceed directly to court if there is a dispute under the agreement; and
- Governing Law: Confirm which jurisdiction’s laws you want to govern the agreement. Popular choices include the state in which your company was formed and the state in which you have your principal place of business.
Speak with a business lawyer about creating your employee equity agreement if you think that you might want to include equity compensation in your business plan. An experienced attorney can help you craft employment contracts that make sense for your employees and your company.
How a Business Lawyer Can Help with Your Equity Compensation Agreement
Using equity as compensation offers a variety of compelling benefits for business owners. Unless you take great care in structuring these agreements, however, you could encounter costly legal hassles.
Drafting a contract for equity in a company requires advanced legal expertise in areas that include:
- Employment laws and regulations,
- Taxation laws, and
- Securities laws.
Your attorney will also assist you in determining the appropriate value of equity to offer each level of employee. This calculation is based on the potential value the employee contributes to the business. For elite talent, you might want to offer a larger percentage stake, to provide the best possible incentive.
Equity compensation arrangements are a great way to incentivize and engage talented employees, but they have to be very well designed and managed. There are a lot of hidden traps, like imputed taxable wages, that require experienced handling.Florida Business Attorney Trevor Brewer
Contact a Florida Contract for Equity Lawyer Today
Brewer Long provides comprehensive legal services to small- and medium-sized businesses in Florida. We have extensive experience in the areas of business, including employment law for employers. We understand the struggles that small companies and start-ups face in today’s competitive marketplace.
We can help you craft strategies that minimize your liability while helping grow your company. To learn more about using contracts for equity with your employees, contact us today