THE DOS AND DON’TS OF SHARING EQUITY

Educate Your Employees DO

Be prepared to tell your staff from the outset how their shares can be monetized with or without a sale or initial public offering, what will happen if they leave the company, and so on, stresses Will Ferguson of Mercer: “Investing the time for them to understand is absolutely crucial.”

Do It Yourself DON’T

There’s no such thing as a one-size-fits-all equity plan, says Dennis J. White of Verrill Dana. Restricted stock is subject to forfeiture if an employee leaves the company early, while nonvoting stock keeps minority stockholders from holding sway over company governance. These plans are “highly complex and raise a bunch of tax, accounting, and securities law issues,” White says, so you really need expert advice to set one up.

Draft a Multiyear Plan DO

“You need a multiyear plan not only for the first 10 people you want to hire but also for the next 100 you hire as you grow,” Ferguson says. You may be more conservative at the start to make the equity last longer. After all, as you progress, you may find you need to lure a seasoned manager with a really competitive offer—while not diluting everyone else’s stake.

Attempt the Impossible DON’T

If cash is tight or dilution fears keep you up at night, you may want to think twice before giving everyone a handout, Ferguson says, especially if your investors are keen on rewarding those closer to the top. Another reason to forgo giving equity to all? If your company is organized as a limited liability company, or LLC, as opposed to a corporation, it will make fashioning equity compensation much more challenging and complicated, White says. Entrepreneurs should also keep in mind that venture capital investors typically place an overall cap of 15 percent or so on the amount of equity that can be reserved for employee options.