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:
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:
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:
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:
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:
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:
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.
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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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