Employee Compensation Plans

Startups commonly often use equity compensation to attract and retain employees, contractors, advisors and others. They are used to provide an ownership interest in the startup as a form of compensation. They also align an employee's interests with the long term growth of a company.

The two main types of equity compensation plans are stock option plans and share purchase plans (an equity compensation plan can also allow for both types of awards to be granted). In a stock option plan, an employee is issued an option which is the right to purchase shares at a specified price in accordance with a specified period (the "vesting period"). For example, the employee can be provided with the right to purchase 4 common shares, with 1 common share available to be purchased each year for 4 years (the vesting schedule or vesting period). In a share purchase plans, employees are given the right to purchase a specified number of shares of their employer at specified intervals and at a specified price.

To simplify and standardize the issuance of equity compensation, startups will often create an equity compensation plan which deals with matters such as the following:

• how the plan will be administered and by whom
• the persons who are eligible to receive an award
• the type of awards that can be issued
• eligibility requirements
• any rights and obligations that arise on the resignation, termination, death or disability of a recipient
• provisions specific to options which are issued, such as those dealing with vesting and exercising of options
• the form of agreements or documents that are to be used in connection with the equity compensation plan

In addition, with private corporations, shareholder agreements can often be used in addition to or instead of the equity compensation plan to give the corporation or founders control over shares once issued to the employees.