In a competitive job market, hiring quality talent and retaining them is key to breaking the clutter and staying alive. This can give brands an upper hand to curate business processes and shape organizations to rise to the top.But, one of the biggest challenges startups face is the inability to afford the best. A candidate that fits the job profile perfectly may be too expensive for a startup or an SMB, which means they must either let go of the “perfect candidate” or pay them what’s due despite a heavy strain on their pockets.Many companies solve this problem by offering equity compensation to their employees to attract qualified talent and retain them.Let’s see how and why equity compensation can benefit your company.
What is Equity Compensation?
Equity compensation entails awarding a portion of your company's ownership to an employee in exchange for their contributions to the company's success. Stock options are granted as part of the benefits package.
Different Types of Equity Compensation
Employers can offer various types of stock compensation based on their business nature and preferences. So let’s look at some different equity compensation methods for employees.
1. Stock Options
Most early-stage firms offer stock options as equity compensation. A stock option gives a shareholder the right to buy a certain number of business shares at a predetermined price. Stock options are a privilege or an option where the employee can opt out of the stock compensation benefit, but after a set period, they might lose their right to claim their stock options.Until the shareholder agrees to exercise their stock options, they do not have voting rights. The stock option agreement determines the price of the shares that the employee must pay.
1.1. Incentive Stock Option (ISO)
An ISO is a stock compensation in which an employee is given the option to purchase shares at a predetermined price at a later time rather than giving them business shares immediately. The predetermined price is referred to as the "strike price" or "exercise price" and the day on which the options are granted is known as the "grant date."The options are subject to a vesting schedule that specifies several dates on which employees can buy company shares. Vesting schedules might range from three to five years.
1.2. Non-qualified Stock Option (NSO)
NSOs are stock options that allow employees to purchase business stock at a predetermined price per the vesting schedule. While NSOs and ISOs may operate similarly, the tax implications are very different. NSOs expose shareholders to income and payroll taxes on the difference between the option exercise price and the stock's fair market value at the time of exercise. This is regarded as compensatory income.
2. Restricted Stock Options or Awards (RSAs)
Restricted stock options or awards are a type of stock in which shareholders cannot transfer their shares until specific conditions are met. When restricted stock awards are adopted as a compensation technique, a startup sets restrictions on the issued stocks.The following are some of the most common restrictions for stock awards:Vesting: The employee must work for the company for a specified amount of time in order to receive their stock compensation.Transfers: Employees must request permission or wait till the vesting date to transfer their stocks or sell them.Companies often limit RSAs to early employees or top executives.
3. Restricted Stock Units (RSU)
A restricted stock unit is an agreement between the employer and the employee to issue stocks in the future or when the employee meets certain criteria set by the employer. In RSUs, each unit is equal to one share of stock or the cash value of that stock. The employee must vest in order to receive the share or cash for their RSU. The settlement date is established by the employer in advance.
Perks of using Equity Compensation for Talent Acquisition and Retention
A startup adding stock options as part of a talent acquisition and retention package can have several perks other than just meeting the cash-flow challenge.Here are a few:
1. Attract quality talent despite lower packages
Employees in the US are considering stock options to be valuable compensation, something that startups can leverage to hire top talent when they cannot provide lucrative corporate salaries.
2. Long-term incentives acting as a performance boost
Some founders and senior managers expressed that equity compensation strengthened their company culture. Team members are found to be more devoted to the company with stock options in offerings. As a result, the employee experience and your organization's revenue improve.
3. Increase longevity with philosophy
As most stock options are conditional, employees are motivated to stay in a company for longer and work more dedicatedly toward the company’s success. A long-term employee benefit like equity compensation enhances employee performance and helps with employee retention.
To Conclude
Setting up an equity compensation plan for your employees can be challenging but also be a profitable scheme, considering its benefits for a startup or a small business. trica equity can be a great tool to ease the process for you - be it creating an equity compensation for your employees or managing your cap tables for investors; we can help you find the right solutions. Contact us for a free demo.
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