Equity and incentive compensation arrangements for employees of startup companies in the US
Equity and incentive compensation arrangements for employees of startup companies in the US

The following Share Incentives guidance note provides comprehensive and up to date legal information covering:

  • Equity and incentive compensation arrangements for employees of startup companies in the US
  • Typical equity and incentive compensation arrangements for startups
  • US tax considerations for FRSPAs
  • US tax considerations for stock options
  • US tax considerations for early exercise stock options
  • US tax considerations for phantom equity
  • US tax considerations for profits interests
  • Single- versus double-trigger change-in-control benefits
  • US tax considerations for change-in-control benefits
  • US tax considerations for retention agreements
  • more

This Practice Note provides a brief introduction to the equity and incentive compensation plans and agreements that US startups often use to attract and retain key personnel. Although it is written with a focus on US companies, many of the issues raised in it are also relevant to a non-US company in the early stages of its development. To effectively advise US startups, and the investors that frequently finance them, it is imperative to understand startup equity and incentive compensation structures, and why and how they may differ from those offered by more mature companies. The following is a general discussion of compensation practices of investor-backed, Kickstarter-funded, and bootstrapped startup enterprises, where the founders’ intended trajectory is to quickly grow the company (and its value) in the hopes of an exit or liquidity event via an initial public offering (IPO) or sale. It is a world of short- to mid-term time horizons where investors (and founders and senior executives) demand significant growth and substantial returns. This is distinct from the mentality driving many new small businesses or family-owned businesses. It is also different than the approach often adopted by more mature private and public companies. One important distinction between mature enterprises and startups is that startups frequently have much less cash available to compensate employees and instead rely more heavily on