Managing Equity Grants for Employees: A Step-by-Step Process for Startups

A Step-by-Step Process for Managing Equity Grants for Employees

Equity grants are a powerful tool for early-stage companies aiming to attract and retain talented individuals who contribute to the company's success. When companies include shares of stock in their remuneration packages, they engage in employee equity. If the startup's valuation increases yearly, the employee's share of the company's ownership might develop into a substantial fortune. 

Financially successful companies may retain their most promising startup employees with an equity incentive package that rewards them for considering long-term. And since they have a vested interest in the company's growth, workers who have stock in the company will work harder to make it a success.

This article will explain the fundamentals of offering employee ownership and handling equity management in your company.

 

How do Equity Grants Work?

Startup equity, in its most basic form, is an expression of ownership in a firm in the form of a proportion of its stock. The first day of business marks 100% ownership for the founders. If your company has multiple founders, you may decide how ownership will be split, such as 50/50, 60/40, 40/40/20, etc. It all comes down to the number of founders and their value to the organization. However, expanding your firm will need to attract additional investors and staff in return for stock. 

To compensate for the high risk that investors assume when backing a company, founders must first part up a sizable chunk of ownership. However, investors often pay more equity grants to a startup if it shows early signs of success or wants less equity in return for their capital as the company matures.  

 

Equity Grant Types

Equity awards come in many forms.  Employees who work for companies with employee stock ownership schemes can purchase shares of company stock at a preset price. However, they must first give the organization a certain number of years of service. Following vesting, they can sell or transfer the option to another party. Employee stock options may be either incentive stock options (ISOs) or nonqualified stock options (NSOs).

Incentive Stock Options - ISO is an employee perk that allows workers to acquire company shares at a discount and may provide tax advantages. The option to purchase shares at a predetermined price (the "exercise price") in return for tax benefits is known as an ISO. This option is solely for startup employees, unlike an NSO.

Nonqualified Stock Options - The option to purchase shares at a predetermined price (the "exercise price") that does not qualify for tax breaks is an NSO. This option is available to workers and non-employees (consultants, board members, etc.). 

Restricted Stock Units - Startup employees granted restricted stock units do not have to wait until the stock options expiration date to become stockholders. Workers usually get RSUs when they have met certain tenure or performance requirements.

Phantom stock options - Even while phantom stock and virtual stock options aren't technically equity, they nonetheless function similarly to equity in that they pay out profits in cash rather than actual corporation shares.

 

Whose equity should you manage?

Failure to communicate changes in ownership clearly and promptly can put investor confidence and financing at risk. As a firm expands, the administrative burden, paperwork, and interactions associated with equity management only increase in complexity. With the help of equity management software, you may provide company shares to anybody, from early investors to staff. 

 

Investors

Keeping investors and other stakeholders in the loop about the company's progress and financial health is integral to equity management. When your stakeholders have more information and feel more confident in your firm, they are more likely to keep investing in it.

Time and resources are needed to keep stakeholders informed. You may choose to provide frequent investor updates that include the following information in addition to delivering electronic certificates to stakeholders:

- Developing trends at your company

- Key performance indicators

- Recent Hirings

- Customer triumphs

 

Stakeholder employees

To a certain extent, your staff members also represent owners. Equity management involves developing a pool of employee options, issuing them, and negotiating conditions with each equity beneficiary. 

The best way to help workers learn about their equity is to provide more information. Access to information about the post-termination exercise (PTE) window, tax filing deadlines, and vesting schedules are all part of effective equity management.

 

Board of Directors

Board management is an essential part of any equity management strategy. Most firms need board permission to issue shares, enlarge option pools, welcome new investments, and recruit executives, which requires exchanging confidential records and updating cap tables and appraisal reports.

 

How to Manage Equity Grants?

Equity management applications are revolutionizing the industry by automating formerly manual tasks and reducing the time spent on them by finance, human resources, and legal departments. Here, you will find a detailed breakdown of the steps required to implement and maintain an effective equity management strategy in a rapidly expanding business.

 

Step 1: Offering Equity Grants

There are many important factors to consider when issuing stock options to startup employees, including

- Name of the grant owner

- Number of issued equity 

- Date of issuance

- Strike rate

- The expiration date of the options 

- Vesting schedule 

Naturally, the internal process administrator must spend a lot of time doing this cautiously for a sizable number of team members.

 

Step 2: Capitalization Tab Management

Managing a cap table might be easier than it seems. When a liquidity event, such as an offering or public listing, occurs, the rights and obligations of shareholders with various share types and preferences vary widely.

The most senior financial stakeholder or a co-founder is often in charge of overseeing the cap table. As part of this process, it is common practice to run elaborate scenario models to foresee how profit split works after an exit. Using stock management software, you may quickly and easily examine the variations of cap table models.

 

Step 3: Communication with Investors and Shareholders

With many businesses having to make unfortunate layoffs and emphasize efficiency lately, keeping everyone updated on developments is necessary. Managing equities well means taking excellent care of shareholders.

Using equity software may also improve communication with investors. With a centralized platform, equity managers may instantly share updates, documents, and other relevant data with a select set of stakeholders or the whole community. Institutional investors concerned with portfolio management would benefit from more streamlined communication.

 

Step 4: Employee onboarding and offboarding

When equity gifts are part of a company's onboarding process, it helps startup employees get off to a good start. Teams also have critical functions to perform when employees depart the company, in addition to the onboarding process.

In some ways, letting an employee go can be more complicated than bringing them on since redundancies can speed up payment and open up workout gaps. Consequently, equity management software will need to reflect these. 

 

Step 5: Managing Paperwork

Contracts are a necessity in business, and when it comes to equity management, they provide companies and employees with assurance and security. It may be challenging for internal teams to coordinate the signing and storage of dozens or even hundreds of contracts.

When a spreadsheet is used as the primary technique for tracking equity, document management may soon become unmanageable.  Equity management software saves valuable time and effort by streamlining the activities of the finance, operations, personnel, and legal departments. 

 

Summing Up

Your firm's success depends on your ability to manage its equity effectively. A platform for managing equity might be useful if you're considering providing stock or are already beginning to develop your company's equity strategy. 

Eqvista is an application for managing cap tables and employee equity that streamlines the process of issuing, documenting, monitoring, and managing shares. As a result, you'll be able to devote more time to growing your firm while devoting less effort to managing its equity. Using the Eqvista app, you may effectively implement all of these recommendations.

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