How to create an employment contract with equity

Some things to be aware of when you create equity contracts.

Woman reading an equity contract

Equity compensation is often a valuable recruitment tool for startups to attract talented workers. If your company plans on creating employment contracts that include equity compensation, this article outlines a few things that you should consider.

Which types of equity compensation would work best?

It’s a good idea to consider which types of compensation would incentivize the people you plan to recruit most effectively before extending offers of employment. Two common types of equity compensation offered by startups are:

  • Restricted stock, which is most often sold or granted to a startup company’s founders or to employees shortly following formation.
  • Stock options, which may be incentive stock options or non-qualified stock options, and which are typically granted by startups once the value of the company’s stock begins to rise, often after a startup’s initial equity financing.

Whatever compensation plan you choose, you need to formally document any equity incentives awarded to employees and non-employee service providers if your plan allows such grants.

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What are the protocols for issuing equity incentives?

There will often be company protocols you should be aware of before issuing equity. These may differ from company to company but will usually include:

  • having all equity incentives approved by the board of directors
  • requiring appropriate paperwork to document each employee’s equity incentives
  • communicating clearly that equity awards can be made only with the approval of the board of directors
  • issuing the appropriate amount of equity compensation for employees performing in different roles for the company

Startups putting serious thought into their equity compensation policies from the outset are less likely to encounter issues, such as treating employees unfairly.

Tax implications

Adding equity to employment contracts will have tax implications. However, it is possible to restructure stock options to be excluded from these rules. In addition, an equity grant or exercise to a non-employee service provider has different tax implications. Oyster has an equity assessment tool to make these complicated tax scenarios easier to understand. In addition, you should consult with a tax advisor or legal professional if you're unsure.

The value of the company shares

Before you offer equity to employees, you need to know how much the shares are worth. You should involve an independent valuation firm to value the company’s shares using a reasonable valuation method.

Vesting for all employee equity incentives will also ensure the employees are incentivized to continue working for the company and will protect the company from an employee leaving shortly after receiving the equity incentives.

Securities law compliance

The grant of equity often triggers complicated tax and securities law questions. Companies with a presence in the United States generally must either file a registration with the Securities and Exchange Commission or determine whether the company qualifies for an exemption from such a filing requirement. International companies must ensure compliance with regulatory agencies in the countries where equity grants take place.

Securities compliance is complicated so you should consult your qualified tax advisor or lawyer for guidance.

How Oyster can help with your equity contracts

To learn more about how you can provide equity to your global workforce, check out Oyster’s Equity Assessment.

Disclaimer: This blog and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, hire, pay, manage, develop and take care of a thriving global workforce. It lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world with reliable, compliant payroll, and great local benefits and perks.

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