As a startup company, you may not have a huge amount of funding available for the salaries of employees. However, you may still want to attract the best. As a result, a lot of startup companies will have some sort of stock incentive plan in place. Let's talk about how you can choose the right one, shall we?

What is a Stock Incentive Plan?

The purpose of an incentive plan is to give your employees shares in the company. Basically, your employees will have part ownership. 

One of the main reasons why startup companies may need a stock incentive is because they will have a lower amount of funds to attract staff. They hope that by giving people stock in a company that has the potential to grow huge, these employees will be more likely to join at a reduced wage. Since the earliest employees of some of the largest companies in the world ended up millionaires due to incentives like this, you can see why it would be attractive to a potential employee.

Stock incentive plans are also a great motivational tool. After all, a person that owns stock now has some sort of motivator. They will be directly profiting from an increased amount of business, so they are more motivated to do the best job possible.

How Do You Choose the Right Stock Incentive Plan?

Your planning should always begin with the production of a cap table. Ideally, you would produce this cap table pre-money, mostly because it becomes harder to convince future investors to dilute their shares in order to recruit employees.It can be done, it is just harder.

The cap table will likely not list the employee incentive at the start. It is just a way to determine what the current company ownership is.

Then, through discussion with all owners and investors in the company, an agreement can be made to determine how much of the company can be given away in stock incentives. It is important that they come to an agreement here, because the value of their stock will go down when some is distributed to employees.

The owners and investors will also need to come up with a plan on how this stock is distributed i.e. how much each new employee is entitled to, particularly with regards to their position. The team may also want to make a decision on whether any further incentives will be given as a 'bonus'.

Honestly, that is all there is to coming up with a plan. Companies will generally be playing about with their cap tables to see what works and what doesn't. However, stock incentive is pretty much just going to be an agreement between shareholders to give away some of their shares.

Once everything is finalized, make sure that everybody signs the document. It can reduce issues in the future.

Legal Obligations

Since handing away ownership of a company can be a 'big deal', it is important that a company works with legal experts. They will help to ensure that everything is 'above board' on the legal front, and they may even be able to provide advice on a better way to distribute shares.

While you can tackle this process without a lawyer, we wouldn't recommend it.

Conclusion 

Just about every startup company that has plans to grow should have some sort of stock incentive plan in place. It is how they attract the right talent. Of course, these companies also need to make sure that they put a lot of effort into the calculations on their cap table to guarantee that they are only giving away what they can afford.