Equity Compensation Plan

Stock Plan Adoption

Many employers see the benefit in implementing employee stock plans. This can include such vehicles as:

  • Employee Stock Ownership Plan (ESOP), an employee benefit plan in which assets are invested in stock of the company
  • Stock options that allow an employee to purchase stock a certain price during a predetermined period of time, with an eye toward reaping the benefit if the price rises as time goes on
  • Employee Stock Purchase Plan (ESPP), which typically offers employees the option to purchase company stock at a discounted price, giving them the option to immediately cash in for a quick profit or hold onto the stock as an investment.

Eikon Law can help you assess the various options before drafting a plan to make sure that all considerations are weighed to align with the needs and goals of your company.

Incentive Stock Option Agreements

Incentive stock options (ISOs) are an alternative compensation tool that can be beneficial to both the employer and employee. For the employer, they provide an attractive incentive to offer a prospective employee, one that can be less expensive than locking into a higher salary and one that would also incentivize the employee to be committed to stay. For the employee, they come with enticing tax advantages over other stock options, such as nonqualified stock options (NSOs), but they do also incorporate risk due to the timing requirements for exercising them.

Requirements include:

  • Define the number of shares to be issued and the employees who will be eligible to receive the ISOs.
  • Shareholders must have approved the agreement
  • Options must be granted within 10 years of developing the agreement or the shareholders’ approval;
  • The option price must be at or higher than the fair market value of the stock when the option is granted
  • The option is not transferable from the eligible employee to others; and
  • The employee receiving the ISO cannot own stock that would amount to that person having more than 10% voting power in the company
  • Perhaps most important, each option must be given out under terms of a written ISO agreement detailing the restrictions in place

Eikon Law can provide you with experienced guidance to help make sure all of your agreements are drafted properly

The Importance of Vesting Schedules

A vesting schedule delineates the timeline and restrictions for issuance and receipt of company stock or other contributions. This can apply to founders and employees, with appropriate schedules for each.

There are three basic types of vesting schedules: immediate, cliff, and graded. With “immediate vesting,” full value is held by the recipient upon issuance. With “cliff vesting,” 100% ownership is transferred at a particular point in time. With “graded vesting,” the recipient gains a percentage over a period of time that eventually results in 100% ownership.

Oftentimes, even founders are not given immediate vesting, with the philosophy that the money or stock is reward not just for the conception of the idea or business but also for the expected continuing contributions. Given both the legalities and the sensitivities potentially involved, it is advisable to have an experienced lawyer involved in this step too.

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