The Advantages and Disadvantages of Employee Equity Incentives

There are numerous ways an employer can seek to incentivize its workforce. Under most circumstances the goal is the same: to give one’s employees a tangible reason to be productive and do everything in their power to improve the company and further the company’s interests.

Incentives are meant to be a win-win situation for employees and employers, providing some sort of benefit to the employee for good work—work which will in turn help the company improve and grow. After all, a motivated workforce can easily be the most important asset a growing company can have.

But which incentive is right for your business? Many startups and growing companies turn to offering stock options or restricted stock to their employees. We have previously discussed the advantages and disadvantages of obtaining funding for one’s business through offering equity, which you can read here, but today we will discuss some of the key advantages and disadvantages of offering equity incentives—meaning shares of your company—to your employees.

Please keep in mind that, as always, this blog does not constitute legal advice for your specific circumstances. Contact our legal team today to have a skilled attorney analyze your company’s unique needs and help advise you on if and how you should utilize equity as an incentive for your team. In addition, depending on the type of incentives that you offer, there are tax implications to these plans that must be considered prior to adopting a plan.

Advantages

There are a number of tangible advantages to offering equity to your employees, the most important of which may be the fact that it will clearly align the interests of your employees with the interests of the company. Employees who own shares (or options to purchase shares) in a company will likely be motivated to do everything they can to help the business succeed because in doing so their shares will grow in value.

Secondly, offering equity, which employees generally will not be able to cash in on until much farther down the road, allows your company to conserve cash in the interim (i.e., reducing salary in exchange for some future potential upside). This is particularly important for startups with limited funding and budgets.

Finally, it should always be your company’s goal to attract and retain the best possible talent. However, it is not always possible to afford the best talent on a tight budget. Thus, equity provides a strong incentive for talented employees to join your team in the first place without costing you too much. Additionally, thanks to vesting, your employees will have a strong reason to stick with the company for a significant period of time, reducing turnover and keeping you from having to spend more time on recruiting and training.

Disadvantages

Equity incentives are not perfect for every business, and there are certainly some key disadvantages. Firstly, no matter how you choose to structure your equity incentive plan, it is going to be much more complex than simply paying your employees cash. It is usually in the best interests of young and growing companies to keep things simple, thus a complicated equity plan may be more trouble than it is worth to some.

Depending on the nature and future prospects of your business, your employees also may not be very interested in owning equity. Many people would prefer up front cash for their work as opposed to taking the risk of their equity not paying off in the future if the company does not grow as expected or goes under.

As a business owner, you should also be wary of the potential for giving away too much equity in your company. Owners who want to remain autonomous and have as much control over the business they founded may not want to offer an equity stake to employees that could give them a significant say in the company’s decision-making process in the future.

Finally, a tax efficient incentive plan is not one that an entrepreneur should attempt to create, adopt, or maintain on his/her own.  There many restrictions in plans in order for them to receive certain tax treatments (e.g., difference between incentive stock options (ISOs) and non-qualified stock options).  Anyone considering an equity incentive plan should consult a qualified attorney in the planning phase.  

Offering equity to your employees can be a boon for some, and a detriment for others, so it is important to consult with a knowledgeable attorney to help you weigh your options. If you are interested in exploring equity as an option for incentivizing your team, please contact the Doida Law Group today and let us help.

© 2018 Doida Law Group, LLC | Privacy Policy | Disclaimer | Sitemap
Top