As companies grow, they typically require some sort of funding or investment to move forward. While many companies utilize their profits and cash reserves to fund capital investments and other necessities for growth, others may not have the resources to do so. This is especially true for small businesses and startups who are working with a shoestring budget.
In these instances, offering equity agreements to employees is often the best avenue to fuel this growth, benefiting both the business and also adding an additional long term value proposition to employees. These agreements exchange either part or all of an employee’s regular pay for a share of equity in a company, allowing the company to free up cash for growth that would otherwise be earmarked for payroll.
How Can Equity Agreements be used to Grow a Business
As previously mentioned, the primary purpose of equity agreements is to allow a company that has limited internal or external funding sources to grow and expand. For startups and small businesses, equity agreements often are the best way to attract and retain top quality employees that would otherwise require salaries too costly to be sustainable.
In addition to the initial cash savings, offering employees equity also gives them a real sense of ownership and personal investment in the company, providing extra incentive for performance. While oftentimes equity in a company is not entirely enough to be the sole compensation for employees, it can save companies a considerable amount in overall payroll costs.
Providing Equity to Employees
There are multiple ways in which a company can give equity to their employees. The business structure of the company will dictate the details surrounding this agreement, with the most common forms of equity being:
- Shares of stock
- Stock options
- Stock warrants
It is important that these equity agreements are structured properly and the administration of this over time is carefully considered. There are various tax documents that must be filed over time, especially as the company and employees become more invested. Unexpected costs can occur as well, which becomes both the responsibility of the company as well as any employees who have equity in it.
Because of this, it is very important to work with a business law attorney when drafting these agreements to ensure that they are structured in a way that protects the interests of both parties and ensures that expectations are clearly set. In order to draft an equity agreement, expertise in certain advanced legal areas is required, including employment laws and regulations, tax laws and securities laws. An attorney will also be able to properly guide a company in determining the appropriate amount of value of equity to offer to employees, which can vary depending on the skills of each employee.