Considerations When Giving Equity to Your Employees
In a rare move Chobani founder and CEO Hamdi Ulukaya announced that 10% of company shares would be distributed to employees. "This isn't a gift. It's a mutual promise to work together with a shared purpose and responsibility" Ulukaya wrote in a letter to employees. While giving equity in a company is very common in startups as a tool for attracting top talent, its less typical for an established company to do so, even more so in the food industry.
Giving away equity in a company is a great way to recruit new employees, retain top talent and motivate personnel to think like owners. However the process is also complicated, costly, and can be ineffective if not done right. Be sure to talk to a tax advisor or lawyer prior to making this move because distributing equity and shares is not right for everyone or every business.
The advantages of offering equity
1. One of the biggest appeals for offering equity in a company is to incentivize employees by offering them a stake in the company success, rewarding long-term value creation instead of short-term results. Employees will feel a stronger connection with the company and a more significant sense of ownership in their work..
2. Offering stock options in lieu of salary is also a great way to conserve cash for other expenses. For cash-strapped startups offering equity in the company is a great way to bring top talent on board with out a major cash outlay.
3. Turnover can be reduced as employees are more motivated to remain with the business to avoid giving up their shares. This can also be a disadvantage as they may be staying with the company for the wrong reasons.
4. Many tech employees in today’s market expect some part of their compensation package to be equity based. This is particularly prevalent when hiring high level engineers and executives.
This disadvantages of offering equity
1. Equity based compensation of any kind is always going to be more complicated than cash, even beyond the initial structuring of the program. An experienced tax and securities attorney will be able to guide you through the process, making sure to meet all federal and state regulations for your S Corp, LLC, or any other business type.
2. One of the biggest risks when offering equity compensation is giving away too much. Employees, consultants and investors all want their fair share of the pie, so make sure you don’t give up a larger portion of shares than needed by consulting your accountant, legal, or other qualified advisor.
3. Equity compensation may make selling the company trickier and may even discourage some investors from investing in your company. Having multiple shareholders could complicate negotiations and drag out an already lengthy process, making some buyers hesitant to pursue deals.
4. The tax implications and potential pitfalls of offering stock options could make anyone’s head spin. Private businesses are especially vulnerable as their stock is not always easy to value and accidentally discounting stock options may lead to some hefty tax penalties.
5. Providing employees with stock options can mean one more person looking over your shoulder. As part owners in the company and its success employees may have some sentiment on the right direction that don’t always align with the owner and founders. It will be important to establish parameters of what having equity in the company will and won’t include so shareholders have clarity.
6. Many states have laws that grant shareholders the right to see the company’s financials and other records. This additional transparency can be a blessing or a curse, depending on how the company is performing, your own comfort level, and how motivated employees are towards the bottom line.
Offering equity may seem a bit overwhelming because offering shares of ownership involves many intricacies. However by offering equity-based plans businesses are able to compensate key employees competitively, recruit top talent and increase loyalty and dedication among employees. Any business owner needs to understand the scope and complexities of offering this kind of compensation and be prepared for a long meeting with their attorney and accountant to discuss the added legal and tax ramifications.