benefits of having equity in a company

Benefits of Having Equity in Your Company

The Many Benefits of Having Equity in the Company

Business is slowing down, and you don’t have the resources to shake things up. New talent, more customers, new markets—it all takes cash on hand. How can you use what you’ve got to restart the engines? The answer? Equity. Let’s explore the different types of shares and the benefits of having equity in a company for business owners, employees, and shareholders.

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Types of Equity Compensation Plans

Never underestimate the value of stock shares in your company. Companies are increasingly offering certain employees equity compensation, giving them partial ownership of the business in lieu of a fatter paycheck.

There are several ways to offer equity compensation, including:

  • Employee Stock Purchase Plans (ESPPs) allow employees to purchase company stock at a discounted price. This incentivizes employees to invest in the company and fosters a sense of belonging and commitment.
  • Stock Options, like Incentive Stock Options (ISOs) and Non-qualified Stock Options (NSOs), give employees the right to buy company shares at a low price after a required vesting period.
  • Preferred Stock is typically reserved for venture capitalists or angel investors in start-ups. Preferred shareholders receive fixed dividends before common stockholders and have priority in the event of liquidation.
  • Performance Shares act as an executive compensation incentive for high-level employees. CEOs and directors may be granted extra shares by hitting certain targets, such as total sales numbers or meeting environmental standards.
  • Restricted Stock Units (RSUs) are granted to employees who meet certain conditions, such as remaining with the company for a specified period. Unlike stock options, RSUs do not require employees to purchase shares, making them a straightforward way to provide equity.

Employers: Benefits of Offering Equity in the Company

One of the biggest advantages of equity compensation is its power as a non-cash benefit. Like health insurance or expense accounts, equity can boost a total compensation and benefits package without increasing salary. This is particularly useful for businesses with limited cash resources. 

As a business owner, offering equity to key employees can also:

  • Attract Top Talent. Equity shares can help attract skilled professionals in a competitive labor market. Many candidates prioritize equity alongside salary when considering job offers, especially when joining companies with high stock prices. 
  • Lower Startup Costs. Startups may offer high equity shares to reserve funding for operations, initial costs, or investments instead of salaries.
    • Pro Tip: While this can solve short-term cash flow problems, it should never be attempted without a corporate lawyer’s guidance.
  • Improve Retention. Equity compensation often comes with vesting periods, encouraging employees to stay with the company longer to reap their full benefits. This can lower turnover rates and reduce the associated recruitment and training costs.
  • Inspire Teamwork. When employees have a financial stake in the company, their interests align more closely with the management’s. If the business does well, so do they, making conflict less likely.
  • Boost Your Reputation. Companies that offer equity compensation may be perceived more favorably in the market, potentially attracting additional investments. A robust employee equity program strengthens your brand by signaling to investors that the company is committed to shared success.

Employees: Benefits for Workers With Equity in Businesses

Equity compensation can be lucrative for workers, especially in high-growth markets. If your company performs well, the share value can increase significantly, providing employees with financial benefits beyond their regular salary. Offering equity shares can substantially enhance your employees’ experience in several ways:

  • Starting a Portfolio. Many employees begin investing with their employer’s stock options, giving them the experience they need to build a strong portfolio.
  • Stronger Engagement. Employees who own a stake in the company often take a more active role at work. This involvement can improve decision-making, collaboration, productivity, and long-term strategic planning.
  • Tax Benefits. Equity compensation can offer tax advantages for both the company and its employees. For example, some stock options may be taxed as capital gains instead of the higher income rate.

Are There Any Drawbacks to Having Company Equity?

Before you rush out to sell your stock, you need to know that employers offering equity compensation must meet all regulatory requirements, including tax laws. While this is important, it can add extra work for existing teams as they manage record updates, policy changes, and ownership transfers.

You will also need to set up a clear vesting schedule for each type of equity you offer. Clearly outline how and when employees can exercise and sell their shares, and include this information in their employment contracts. Make sure employees know how many stocks they have, the type of equity, and how long it will take to vest. This approach simplifies compliance and helps employees understand their benefits better.

As the initial owner, giving, granting, or selling a minority stake in the business others means that you will have obligations to them as minority shareholders. There are statutory requirements and those requirements that could be mandated by your company’s governing documents. Many times, the majority shareholders owe fiduciary duties to the minority shareholders. Failing to obey these duties and responsibilities could have severe consequences.

Finally, you need to revise your business plan, adding stipulations for which employees qualify for equity and when. You should also have an attorney look over the document to make sure you retain the lion’s share of your company.

Talk to a Small Business Lawyer About an Equity Plan

As the owner of a small business, it’s hard to know when to offer equity to an employee. If you’re considering stock options, we can help you make decisions to preserve the future of your corporation. Please email us at [email protected] today or schedule a 15-minute call to get answers to your questions.