Employee Option Plan
Why adopt an Employee Option Plan?
An Employee Option Plan enables the company to remunerate key staff members with equity. You may have heard the term “sweat equity”, which means paying employees for their work (ie, sweat) with equity incentives. There are 2 main reasons to do this:
- The company can hire key staff members and grow the team without needing to raise cash to pay their salaries.
- Giving key employees a stake in the ownership of the business aligns their incentives with those of the shareholders and helps to motivate them to work hard towards increasing the value of the business
A Proper structuring needed for tax deferral
Where the price for purchasing the shares (ie, the exercise price of the options) is a discount to the current market price, without proper structuring, the employee may be taxed on the discount in the year in which the options are granted, even though the employee does not receive any money with which to pay that tax at that time. Your Employee Option Plan needs to be carefully structured to ensure that tax is deferred until a later time at, or closer to, a liquidity event in which the options or resulting shares are sold
Giving key employees a stake in the ownership of the business aligns their incentives with those of the shareholders and helps to motivate them to work hard towards increasing the value of the business.
Time To Complete:
Approximately 10 minutes.
Length:
Approximately 5 pages long.
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