Giving Stock to Your Employees — How and How Much?

07 June 2013 Privacy, Cybersecurity & Technology Law Perspectives Blog

Equity grants can be an attractive alternative to cash when compensating employees, consultants, and service providers. However, if not structured properly, equity grants can cause some nasty consequences for the recipient. Additionally, deciding on the proper number of shares can be difficult.

An issuance of stock can result in a tax liability for the recipient, as if he or she received cash. Considering that the equity of most private companies can’t be readily sold, the result is a tax bill for the recipient with no cash to cover the taxes. Also, there’s no guarantee that the shares will ever result in cash proceeds.

In many cases, a stock option, with a strike price equal to the fair market value of the underlying shares on the date of grant, will be the preferred form of grant. Such options also would normally be subject to vesting.

As for the right number of shares, everyone knows that the real question is one of percentages, not numbers. However, many companies prefer a cap table that allows them to issue grants for at least 10,000 shares. Larger numbers look and feel better, even though the recipient knows that a large number may represent a small percentage.

When considering the right percentage for a grant, the two most common reference points are: 1) what have other individuals in the company received, and 2) what do similarly situated recipients in comparable companies receive?

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