Are you figuring out the equity incentive plan basics for your startup?
Thinking about offering equity incentives to key players in your startup business? Why would you? What are the basics of an equity incentive plan that really works for everyone?
Equity can be a highly valuable and powerful tool for entrepreneurs. Even early-stage startups can find it unlocks incredible value for them and makes so much possible, far faster than many could imagine. Equity incentive plans can also be a tricky beast. They can bite you back or limit your potential, or at least throw some serious wrenches in your vision if you aren’t careful
So, when should you offer equity? Who should get it? How much should be given? What contractual and negotiating tips can help founders maximize the upside and minimize risks?
What Is An Equity Incentive Plan?
When understanding the equity incentive plan basics it is important to note they are a way of offering value and compensation. This is in the form of stock, stock options or the ability to earn shares in the company. This is in contrast with upfront compensation and cash now. In virtually all cases it is a motivating incentive based upon what the value of equity in your company may be worth in the future.
Equity incentive plans are most common among the earliest hires in a startup, both pre and post Seed round, as well as for executive positions.
It is important to note here that prior to fundraising investors would expect that you have the equity incentive plan in place to avoid having them getting diluted.
When it comes down to fundraising keep in mind that it is all about storytelling. For a winning deck, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Why Use & Offer Equity Incentive Plans?
There can be many reasons why you want to understand the equity incentive plan basics, including the following.
Keep Company Financials Strong
Overhead can not only cause cash flow problems, but debt and commitments to big salaries can weaken your overall financials, profitability, and flexibility. This can cause problems every day, and specifically when trying to raise financing. Giving equity in lieu of some compensation means lowering regular expenses, and only really paying out when things are successful.
Attracting Strong Talent For Less
The startup with the best talent wins. Obviously the best talent isn’t cheap. This leads many entrepreneurs to sabotage their own startups by either hiring cheap labor or trying to do everything themselves. They don’t feel they can pay big salaries or bonuses to lure good talent. Of course, if you can’t afford good talent, you probably can’t afford to be in business
Equity incentive plans are the tie-breaker here. You can offer recruits a split of base salary and a piece of the company. If your business succeeds that equity could end up being worth millions of dollars, or even a billion one day. It’s a way for you to get the edge, and afford awesome people.
This can apply to talent for daily work, remote and fractional roles, and advisors. You can imagine how much it would cost to recruit a top executive or advisor, even part-time. That’s probably more than your first-year revenues. Giving them equity can help bring them in, without cash out of pocket.
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