Creating company ownership through employee equity

Every company should value building a top-tier team that’s dedicated to driving the company goals and mission forward. However, to bring on committed employees who will help grow and scale the business can be easier said than done. To attract and keep top talent, companies can offer the incentive of employee equity.

When companies offer employee equity, they offer an employee benefit plan that gives team members ownership interest in the company through the form of stocks or a number of shares. Companies of all sizes, from early stage startups to medium-sized private companies to large, public companies, can offer an employee stock option plan to reduce the costs associated with recruitment and employee turnover by bringing on longer-term employees.

Offering an employee stock ownership plan (ESOP) can help employees gain a greater sense of investment and ownership in the growth and future of the company, and incentivize them to work harder to reach company goals.

Not only that, but an employee stock ownership plan can help employees work towards long term capital gains and give the company a competitive advantage throughout the recruitment process. This is especially crucial in light of recent mass resignations and talent shortages that have resulted from the growing digital transformation era and the aftermath of the pandemic.

If your company is considering offering employee equity, here’s what you need to know:

1. Establish an employee stock option pool. Most companies set aside a certain percentage of their equity — usually between 10–15% — for this pool for future employees. This percentage can be increased or decreased as the equity gets further distributed and more employees come on board. However, as your employee base gets bigger and the equity pool starts to diminish, you can dilute the percentage of the business that existing employees own to increase the overall equity in the pool.

2. Decide on a vesting period. The vesting period is the period of time in which employees earn the stock that they are given while working for the company. The vesting period ensures that employees won’t join a company just to immediately leave with stock shares.

Upon an employee’s resignation, the company can buy the “vested” shares back in exchange for a lump sum or periodic payments. The vested shares are then redistributed into the stock option pool for future employees. However, it’s important to note that when employees leave, they cannot take the shares of stock with them.

Throughout an employee’s time at a company, the number of shares they hold can increase over time. However, they may not be able to sell the shares until they are retiring, facing termination, or resigning from the company.

3. Choose the type of equity you’ll distribute. Of the types of equities to include in a stock options plan, the three most common are:

Stock options, which give employees the right to buy or sell shares from the founders between the time they’ve vested their stock options to the expiration date. Stock options are the most commonly distributed equity type.

Alternatively, a company can offer stock warrants, which grant the employee the right to buy or sell shares from the company between the vesting and expiration periods.

Lastly, a company can distribute stock grants, which give employees ownership to a certain amount of stock. These can be immediately shared as there is no period in which employees can exercise the right to buy or sell.

4. Divvy up the equity. There are many ways that companies can assign equity to employees throughout the company. Unfortunately, there is no “right” blueprint that companies can follow — It all comes down to each company’s preference and team structure.

For example, some companies may base the amount of equity on the hierarchy of seniority, meaning those in executive positions have the greatest percentage of ownership while new hires and more junior staff have significantly less. Others may make this determination based on tenure and time at the company, role, or function.

Something to consider when deciding on how to distribute your employee equity plan is that investors will get involved. As significant shareholders of the company, investors will want to own as big of a portion of the company as possible. This means companies must ensure their investors are not getting edged out when determining how to allocate percentages of equity across the organization.

5. Create a plan for how former employees can exercise the options you gave them. When employees resign or leave a company, it’s important to understand their options when it comes to what they can do with their equity. There are various options from 30–90 day windows, 10-year windows, and variable windows that you can choose from. The post-termination exercise period method you choose will depend on how much cash the employee holds.

The important thing to remember is that equity is an amazing tool that can be leveraged to reward early company hires for taking the risk of saying “Yes” to your company. The best news is that an employee stock ownership plan can be the gift that doesn’t stop giving — It empowers employees with a sense of ownership and aligns their vision with that of key stakeholders, and also benefits them both throughout and after their time at the company.

By creating an ESOP, your company will have an advantage in the hiring market and attract top talent who are most likely interested in working hard for long-term benefits.