Equity · Equity contracts

Making it official: How to formalize rewarding my first hires with equity?

Stacy Kirk CEO/Founder, QualityWorks Consulting Group & Nodeqa.io

October 7th, 2016

I would like to offer my staff equity/shares for their vital participation in our growth. We are now profitable with 100% ownership by the founder. What's a good percentage for the first 10 employees and how do I go about finalizing equity contracts? Are there contract templates for this? 
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Anthony Miller

October 7th, 2016

Hi Stacy!

Most early startups will offer equity that accrues over a period of time 3-4 years for 100% vesting. There are some good templates on docracy. http://www.docracy.com/

Good luck!

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

October 7th, 2016

You have built a profitable company. You now want to give a way a portion of what you have and seek advice on FD? Call your lawyer. Templates are for people who cannot afford one.  There are tax ramifications that templates will not advise you about.  

Joseph Wang Chief Science Officer at Bitquant Research Laboratories

October 7th, 2016

You can look at the templates to get an idea of what financial structures are possible, but you do not want to directly use the templates, since there are all sorts of landmines, and a lawyer is very cheap for this sort of thing. 

The reason that a review by a lawyer is important, is that if you do it wrong, this is the type of thing that you can't undo easily.  If you issue shares and there is a problem, then you can't unissue the shares and do it over, whereas if you mess up a vendor contract, then you can usually renegotiate it later.  Also, this has impact on later fundraising.  If you have the wrong clause in the contracts, then you are looking for extreme pain when it comes time to cash out and make your millions.

The trouble I've found is while a lawyer is important for making sure that the contract is valid, they may or may not know whether the contract is correct from a business sense, but if you don't have a lawyer that you trust, this is an opportunity to find one. 

As far as what is possible.  The best thing to do is to do the calculation in dollars.  Realistically figure out how much the shares are likely to be worth in cash (using discounted cash flow or something similar), and then once you have figured out the cash value of the shares both now and in the future, you can figure out how much equity to give away.

The next step is to figure out the mechanism for giving away equity.  The two choices you will have to make is the vesting schedule (i.e. how long someone has to work before the get equity) and the capital structure (i.e. do you want to give the shares in the form of a convertible note, preferred shares, options, or straight equity).  If you can find a mentor that knows VC they can be useful here (and if you are in HK, I can find you mentors for this).

AJ Johnston Owner at Law Office of Ann E. Johnston

October 10th, 2016

I'm going to be faced with this problem in the future.  I am interested in folks responses.