Early-stage startups often provide incentive equity as part of the compensation packages for key service providers such as advisors, directors, and employees.

Incentive equity is often part of the compensation package for advisors, employees, and other service providers during the growth stages of a startup. However, incentive equity must be executed properly to ensure that it achieves the desired incentive effects and complies with securities laws and regulations. goodcounsel can assist with the drafting and implementation of equity incentive plans and the execution of individual grants of equity, options, and other rights.

What is incentive equity?

Incentive equity is an ownership interest in a company or an option or similar equity-based right, which is issued in exchange for services. Companies often adopt an equity incentive plan, which describes the general terms for grants of incentive equity. An equity incentive plan can also play a role in the management of equity dilution.

Why should my startup consider issuing incentive equity?

Incentive equity, when paired with a proper vesting schedule, can increase a service provider’s dedication to a startup and encourage longevity of service. The use of incentive equity can also reduce the cash demands on a business, since the equity “upside” partially replaces current cash compensation.

What are the drawbacks of issuing incentive equity?

Every piece of equity that belongs to a service provider or investor is a piece of equity not owned by the founders. Incentive equity dilutes the founders’ equity and, if not properly managed, can create issues during funding rounds or when important decisions must be made about the business. Additionally, improperly granted equity can lead to violations of securities laws, which can result in personal liability for the founders.

How does goodcounsel help with incentive equity?

goodcounsel regularly helps its clients set up incentive equity programs. We can help founders understand the implications of incentive equity grants and ensure that the incentive equity plan and individual grants further the company’s long-term goals.

Most law firm include the following for an incentive equity matter:

• Creation of an equity incentive plan.
• Drafting an individual equity incentive grant (option or equity).
• Furnishing an 83(b) tax election form.

goodcounsel provides the above and more. goodcounel will always tailor individual documents to match client goals and will assist the founders by providing the knowledge necessary for the founders to make wise choices. 

We provide the documents necessary to issue the grants and consents necessary to ensure you comply with your governance responsibilities. As a courtesy, we will draft an 83(b) election form for any grant with a vesting schedule. And we facilitate the signing process through electronic signing platforms to make the execution of the grant quick and simple. Finally, goodcounsel always includes securities compliance with any type of equity grant. 

An equity incentive grant will often accompany an employment or independent contractor agreement, so if you are considering a grant to a potential service provider you may want to see our employee and service provider services.

How much will this cost?

goodcounsel understands that startups prefer the predictability of fixed-fee arrangements, so we offer most of our incentive equity services on this basis. On rare occasions, if a grant requires negotiation or substantial additional work we may suggest an hourly arrangement.

How long will this take?

The normal turnaround time on an individual grant or advisor agreement will be one week and the turnaround time for an equity incentive plan will be two weeks. However, our ability to turnaround documents quickly is premised on the cooperation of the founders and the grantees. Additional communication and negotiation can delay completion of an incentive equity engagement.

Where can I learn more about incentive equity?

goodcounsel’s goodthinking! blog contains a variety of information relevant to early-stage companies, including posts about the relative merits of convertible notes and equity, the origins of SAFE financing, and more.

Can I just do this myself?

Many founders are resourceful and engage in do-it-yourself legal work. However, think twice about attempting to do incentive equity grants yourself. Equity allocation is one of the most important issues in a startup. Unwise decisions or mistakes here can impact founder ownership or control of the company or disappoint the expectations of key service providers. It is best to work with legal professionals on these matters.