Many early stage companies are providing stock as an incentive to motivate employees. This is a good way to compete against the larger salaries that large corporations are able to offer. Especially when it comes down to engineers that receive $100K+ coming out of college in places like the Bay Area.
To provide some background on our specific structure, and current situation, we do not have any revenue at the moment and we are structured as an S-Corp. We are also looking to make the first hires so we are at the Seed stage of the company.
Given our current circumstances, should we go with giving out stock options with a 4 year vesting and a 1 year cliff or go straight to restricted stock?
Thank you so much for your time.
Its all valid points below, but I also think you should set your expectations correct when it comes to lower salary. The larger corps offers Stocks (with real value on the market) a joining bonus and High salary blus cash bonus. So to offset a salary decrease you probably need to make them a major offer of stocks. If you look at google you may receive 100-150k i stocks that vests for 4 years when you join.
So take you seed company that got a valuation of 1M you would need to still give a way 10% of the company and match salary if you only look at it as an offset. And anyone who joins the startup is taking a huge risk spending time on the start up.
I am all for giving out stocks to the employees they should be part of the success. But the engineers you seek must join a start up for other reasons than the money.
Look at it as a excellent way to sharpen your sales skills by selling the new hires on your vision. So they believe in that and stay because of that and of course if goes well they will be rewarded well. But as you know most startups stocks becomes worthless so you still need to pay a decent market salary in most cases at least if you want to retain some control over the company.
The issue with using restricted stock is that as it vests, there is a taxable event. Unless the company is public or ready to buy back shares to provide employees cash to pay the taxes, you could cause a significant issue for them. If the company is public, RSUs are preferred because they have real value where options are valuable only when above the exercise price. Here is a good discussion in the matter. https://www.capshare.com/blog/rsus-vs-options/
Restricted Stock will be more attractive to your prospective employees.
You can create a vesting structure with either (with Restricted Stock you can employ decaying buy back rights to create the same effect as vesting).
RSUs have no strike price (so the employee receives the full value of the share) and have tax benefits, especially in the very early stages where the company valuation is still quite low (see 83b election).
These are just highlights - lots of info on the web on this topic, and you should consult an attorney for the details / putting the structure in place.