How to create an employment contract with equity

Equity compensation is a non-cash payment that gives employees an ownership stake in the company. For startups and high-growth companies, it's a powerful tool to attract top talent when cash flow is tight, with the SEC estimating that approximately 60% of registrants maintain equity compensation plans. By including equity in an employment contract, you're not just offering a job—you're offering a piece of the future you're building together. This article outlines what you need to consider when creating an employment contract that includes equity, from choosing the right type to navigating compliance.

Why Offer Equity Compensation to Employees?

So, why offer equity to your team? Here's what it actually does for your business:

• Attracts top talent: Compete with bigger companies when cash is tight
• Aligns interests: Employees think like owners when they have skin in the game
• Builds commitment: Equity creates partners, not just workers

Which types of equity compensation would work best?

Before you extend any offers, think about which equity type will actually motivate your specific hires. Two main options work for most startups:

• 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.

Wondering how Oyster fits into your big picture? Book a customized demo to see what your day-to-day could look like with our global employment platform.

Key Components of Equity Employment Contracts

Here's the thing—your equity agreement needs to be crystal clear to avoid headaches later. Every contract should spell out these essential details:

• Type of equity: Specify whether you are granting stock options, restricted stock units (RSUs), or another form of equity.
• Vesting schedule: Outline the timeline over which the employee earns full ownership of the equity. A typical schedule is four years with a one-year cliff.
• Grant size: State the exact number of shares or options being granted.
• Exercise price: For stock options, this is the price at which the employee can purchase the shares.
• Termination rules: Explain what happens to vested and unvested equity if the employee leaves the company for any reason.

What are the protocols for issuing equity incentives?

Most companies have internal rules you'll need to follow. While these vary, the basics typically include:

• having all equity incentives approved by the board of directors, as amendments to plans can be significant enough to be triggering proxy or information statement disclosure
• 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

Let's be honest—equity means taxes, and they get complicated fast. The good news? You can structure stock options to minimize some tax hits. But here's the catch: contractor equity follows different rules entirely.

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

You can't offer what you can't price. Get an independent valuation firm to determine your share value using accepted methods.

Pro tip: Always include vesting schedules. They keep employees around longer and protect you if someone leaves right after getting their equity.

Securities law compliance

Equity grants trigger serious legal requirements, as regulators mandate that registrants must comply with new disclosure requirements for annual reports and proxy statements. Here's what you're dealing with:

• US companies: File with the Securities and Exchange Commission or qualify for an exemption
• International companies: Comply with local regulatory agencies in each country

Bottom line: This stuff is complicated. Get qualified legal and tax advice before you move forward.

Documentation and Templates for Equity Contracts

Documentation isn't optional—it's your legal safety net. Every equity grant needs a paper trail that includes:

• An equity incentive plan: The formal company-wide document that governs all equity grants.
• A board resolution: Official approval from your board of directors for the specific grant.
• A grant agreement: The contract signed by the employee that details the specific terms of their equity award.

While templates can be a useful starting point, these documents have significant legal and financial implications. Always have them reviewed by qualified legal and tax professionals.

Building Your Global Equity Strategy

Offering equity to a global team adds another layer of complexity. Tax laws, securities regulations, and reporting requirements vary significantly from one country to another. Getting it wrong can lead to compliance penalties and a poor employee experience. Oyster's global employment platform helps you navigate these challenges, allowing you to offer competitive and compliant equity to your team members, no matter where they live. If you're ready to build a truly global team, start hiring globally with a partner who understands the complexities.

‍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.

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