When forming a company, the founders are usually a small group of people who come together. Here, the company may not have any employees at startup and it might even take months or a few years before employing people into the company. That is why most companies postpone creating incentive plans until they hire. A stock incentive plan is a good strategy that startups use to motivate the people who work for them. It is ideal to incorporate the plan from the word go.
What is Stock Incentive Plan?
At startups, most ventures can’t afford to pay their employees big salaries. However, they can reciprocate this lack of cash by motivating their employees with the company’s shares. This is what is referred to as a stock incentive plan. It creates the means to dispense shares as compensation for the services rendered by the employee, advisor, or contractor.
In simpler terms, a stock incentive plan is a communal benefit that provides an employee the right to acquire shares of a business at a bargain-basement price. The period the employee takes in a startup also affects the shares they own. The longer the period, the more the shares.
The plans are measures taken by a company to retain key managers, employees, or contractors. These require a consigning period of two years (at least) and a one-year holding period before the stocks can be sold. The taxation on the profits is more auspicious compared to other types of stock procurement plans.
Creating Stock Incentive Plan
As a founder of a young company, it is ideal to have a stock incentive plan when starting it up. This is beneficial in various ways. These include;
Locking the Cap Table
Incorporating a stock incentive plan at the very start allows the founders to know what percentage can be presented to the employees, contractors, and advisors. This enables easier negotiations with them as you know how each grant impacts the cap table.
Implementing a stock incentive plan at the beginning saves you the cost of fulfilling securities laws as every startup grant requires you to meet with securities laws. There will be no added legal and filing fees in states that require notice for filing this incentive plan.
This plan, once implemented at the startup, provides the originators of a company with the currency for hiring talent. It easily entices employees who want to use their talent to bring money to the company and make their name out of it in the long run.
Attraction and Retention
The key employees will want to stay longer to make sure that their stock grows with time. This means that you benefit from the talent while the employee vests in the company. It’s a win-win situation because this will also attract other talented employees to the company.
Factors That affect Issuance of A Stock Incentive Plan
- The number of shares– The board of directors will determine the appropriate percentage issued to the employee. This ranges from about 5%-20% of the outstanding stock in the company.
- The number of granted options of the employee– This is entirely determined by the company’s guidelines on the job position.
- Approval from the stockholder
- Termination of employment– The program should state that the grant doesn’t guarantee continued relations with the company after terminating employment.
- Period of exercising– If an employee terminates the employment, they are given 30-90 days to exercise the plan.
Stock incentive plans are crucial for any company that is starting up and is looking to grow its business. Adopting this plan ensures the company scales to new heights. This permits the company to stake proprietorship with its employees. What’s more, the employees align their interests with those of the company’s.