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

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.