Are you prepared to open up your books to your equity-holding employees? You may also find that your employees aren’t up to the task of ownership and shy away from some tough decisions that come with the territory. You also give up a lot of privacy when you have shareholders. What are you going to do if one of your equity-holding employees balks at the sale? By the same token, since your employees’ shares are virtually worthless until you sell the company or take it public, they may pressure you to sell when you don’t want to. Selling your company is also more complicated if you’ve given away equity, as many purchasers may want to buy 100% of the company. When an employee with equity leaves, the restructuring that’s involved gets complex all over again. You need to talk to a securities attorney to make sure you’re complying with securities and anti-fraud laws and a tax attorney to handle the complicated tax implications. That being said, equity-based compensation is complex, very complex. If the business financially grows, so too does the employee’s net worth. Therefore, equity stock options can boost loyalty and work ethic as this workforce has a driving interest in the company.
On top of these benefits, employees who own a part of the company can work harder than those who don’t, as they feel like they have skin in the game.
Finally, you may be in need of some serious talent as you get started, and handing out equity gives you a chance to snag the right people. That means you’re also less likely to hire someone looking to cash out at your expense, and it reduces the need to raise funds. Providing stock grants in early stage startups lets you reduce the money you need for salaries. Giving out equity also benefits your company. Depending on how you schedule the vesting of equity, you can also keep employee turnover to a minimum. As the head of your company, you know you have to wait for a big payout, and when your employees have equity, they share that long-term attitude.
Having partial ownership in the company is a great incentive and can boost loyalty. If you’re running a startup, the top talent you seek may expect stock as a condition of working for you. Advantages of Entry-Level Employee Stock Options
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