My name is Kathryn Turpin, and I want to speak for a couple of minutes about something that many business owners face during the lifespan of their business, and that is whether and how to give your employees an equity interest in your company.
Pros and Cons of Equity Interest
One obvious benefit of doing that is that when you have employees that have an interest in the company, they have a sense of ownership and pride in the business, and that’s really a good thing.
But there are many disadvantages and consequences of providing equity to your employees. I’ll only go over three of them.
1. Your employees do end up with voting rights in the company. And that may or may not be a significant thing to you.
2. As an equity owner, employees now have the right to inspect the company’s books and records and demand a certain minimum level of financial disclosure from the company every year.
3. This is a big one: you want to make sure that you have the right to purchase the employee’s interest if the employee leaves the company. You really don’t want your employee to leave and go work with a competitor while they still have an interest in your company.
How to Grant Your Employees Equity
So, once you’ve made the decision to grant equity to your employees, you then need to consider how to go about doing that. This can be a really complicated decision, because there are many tax and regulatory issues involved.
I’ll just review a couple of the alternatives available to you.
Sell or Grant an Interest
One easy solution is to sell an interest in your company or give your employees an option to buy an interest in your company. The disadvantage of this is that your employees have to come up with cash to purchase that interest.
Another alternative is to just grant employees an interest in the company. This is like giving a cash bonus, but it’s giving a bonus of interest in the company to your employees. Now your employees will have taxable income, so they’ll still have to come up with cash to pay the income taxes on that grant.
If you do grant interest to employees, you may want to consider granting what is called restricted stock. Restricted stock is stock that vests over time, and you can choose the time period. For example, if you granted 1000 shares of restricted stock, vested over four years with 250 shares vesting every year over four years.
Cash Bonus Plans
As a final comment, instead of giving equity to your employees, you may want to consider implementing and structuring a good, solid cash bonus plan. You can base the cash bonus plan on any metrics that are meaningful to the employee, and you don’t have to use the same metrics for every employee, and that might end up being a better solution, with fewer disadvantages for both you and the employee.