You've decided to offer an equity compensation plan, and both the design and implementation need to be executed flawlessly. To ensure success, you'll need to consider several key factors. Keep reading for important details to guide you through the process of designing and implementing your equity compensation plan.
Define the purpose and strategy of your plan
When consulting with your executive team, it is essential to identify the underlying objectives and goals of the program. Start by clarifying what you want to achieve and work backwards to assess the program's constraints and opportunities.
- Are you aiming to attract and retain employees?
- Do you have specific performance goals for certain employees to meet by a set deadline?
- Are you looking to incentivize your leadership team?
A successful equity compensation program should drive participant behavior. To design a program that aligns with your company's needs, prioritize your objectives and conduct a cost-benefit analysis to determine the most effective approach.
Determine how you will manage the plan
An equity compensation plan is a significant investment, so it is crucial to establish the day-to-day administration and management tasks. Outline the necessary steps and determine which departments will be responsible.
You have options for managing your plan: will you use an in-house solution or outsource to a team with vast experience? Be sure to research the costs associated with each option and factor them into your budget.
Set a budget
Establishing and managing an equity compensation plan involves costs, typically for the administration, communication, and execution of the plan, along with the value of the stock options.
It is also important to have experts in place to manage the plan's expenses and any related financial obligations. Additionally, ensure that stock options are tracked accurately and administered properly to avoid unforeseen fines or penalties. Be sure to account for these costs in your budget.
Establish an option pool
Reserving a block of stock allows your company to offer equity incentives using shares set aside in your option pool This enables you to reward stakeholders who have been instrumental in the success of your business and those eligible for your equity compensation plan.
By establishing an option pool, you can help prevent dilution of existing shareholders and manage how ownership structure evoves. Once the option pool is in place, you can determine the types of awards to grant.
Know your options
When designing your plan, It's crucial to determine the types of awards, understand the legal implications of each, and evaluate any tax considerations that could either benefit or complicate the plan's structure. Completing this analysis before finalizing the options you'll offer is essential to ensure the plan's success.
Understand the legal and regulatory framework
The type of equity compensation you offer, along with payment options and participant eligibility, is subject to various legal, tax, and accounting regulations. Compliance is critical, as even small errors can result in significant fines and penalties for both your company and the individual participants.
A solid understanding of these legal and regulatory requirements from the beginning allows you to design a plan that best suits your company and employees. Keep in mind, however, that these regulations can change, so you'll need to stay updated and implement any necessary amendments into your plan.
Obtain key stakeholder approval
Once you've finalized your plan and addressed the considerations outlined above, you will need to obtain final approval from stakeholders before launching it.
However, the board of directors' role doesn't end with plan approval. The board is also responsible for approving the following:
- Which employees receive awards
- Number of shares granted
- Vesting schedule
- Exercise price
Additionally, the board determines the grant date which is significant for accounting, tax, and legal purposes, as it establishes the option's exercise price.
Inform and educate employees
You likely started your equity compensation plan to attract, motivate, and retain top talent, but those are just the company's benefits. For your plan to succeed, employees need to understand how it benefits them as well.
Employees have varying degrees of financial literacy, and some may not know what an equity compensation plan is or how it works. Start by covering the basics - explaining stock options, defining key terms and outlining their choices for accepting grants, managing holdings, and what happens if they leave the company.
There are many ways to promote your plan, so identify the communication preferences of your participants, whether it's though online platforms, text apps, or videos.