![]() ![]() ![]() Stock that is priced low at the start can be a huge incentive to get top talent onto a startup’s team. When founders implement the stock incentive plan at the start, they have available low-priced stock that can be used to grant stock options to key contractors, advisors, and employees. Imagine you had 50,000 shares of Facebook right now and you paid $0.05 for it you would have millions of dollars and be more than satisfied with your return. The price per share may be something like $.00001 at that price, one could buy 1 million shares for $10. When the stock incentive plan is put in place at the outset, founders now can lure talent who want to be able to say, “I made millions from my stock as one of the first employees of XYZ Startup.”Įarly in a startup’s life, the company is valued at next to nothing, and the stock price reflects that. Other exemptions from registration may require you to make a filing for every sale.Īdditionally, the other great efficiency of stock incentive plans is that grantees only need to provide services to the corporation to comply with the exemption and the corporation does not have to comply with the more rigorous accredited-investor qualifications (or its state equivalent) that every other securities exemption would require.Ĭurrency: A stock incentive plan also gives founders, at the beginning, much needed currency to hire talent. For the states that do require a notice filing for a stock incentive plan, once you make the filing, there are no additional legal fees and filing fees for each new sale after you make your first filing. The SEC and most state laws provide an exemption from registration sales from stock plans that are properly adopted by corporation, which means that once the plan is adopted, every future sale of stock out of the plan is exempt from registration, even if the price of the stock goes up (note, there are limits to the total value of stock that can be sold from a plan in a single year, but no pre-revenue startup will ever hit those limits). Most exemptions from securities registrations at the federal and state level require a notice filing for each stock sale, which also requires paying legal fees and filing fees. Every sale and offer of stock must be registered with the SEC or state authorities unless the sale of the stock is exempt from registration. It also makes negotiating with advisors, employees, and contractors much easier because you know exactly how each grant affects your cap table.Įfficiency: Adopting a stock incentive plan at the outset saves you a ton of costs and headache that are associated with complying with securities laws. The reason for this is that every time a startup grants or sells stock to someone, it needs to comply with securities laws. ![]() That is what we call locking your cap table. Locks Your Cap Table: By adopting the stock incentive plan on formation, the founders will know exactly what percentage of the company can be offered to advisors, employees, and contractors. 4 Reasons To Create a Stock Incentive Plan When You Form Your Companyįounders of young companies may not yet have employees to grant stocks, but setting up the stock incentive plan when a venture is first formed is ideal for a number of reasons: Hopefully, the company wins angel and venture capital investment, becomes a great success, and exits via an IPO or acquisition - creating a huge windfall for the employee as the shares granted from the stock incentive plan skyrocket in value. Also, you can keep these persons engaged with time-based vesting, so the longer the employee stays with the startup, the more shares he or she will own. You will be surprised by how many people are willing to work for equity because of the allure of the prospect of a big payoff down the road when the startup sells or goes public.Ī stock incentive plan, or stock option plan, creates a method to dole out shares as compensation as soon as the advisor, employee, or contractor starts providing services. What is a Stock Incentive Plan?Ĭash-poor startups with no revenue don’t have the means to pay employees attractive salaries, but they can make up for the lack of cash by paying for services with its shares. In reality, a stock incentive plan is a powerful tool founders can use to incentivize employees, advisors and contractors, so a startup should adopt a stock incentive plan as soon as it is formed. So you might think a stock incentive plan - usually considered a motivational tool for employees - is something a startup can wait to set up until the venture is ready to hire. Startups usually begin with a small group of founders, and they may not hire employees for months or even years after forming. ![]()
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