Startup companies often have to do their very best to avoid taking on debt or giving up too much cash. One of the most costly parts of any business is the employees. You may be entertaining the idea of offering equity to employees at your startup. Let’s take a look at the pros and cons.
Benefits of Offering Stock Options at a Startup
Since you’ll undoubtedly be looking to lower costs at your new business, cutting employee salaries is often a very effective way to do that. However, offering lower salary will probably mean you get lower quality work. Low quality work is not acceptable at any successful business, but especially not at a startup.
Offering equity to employees at your startup is a great way to attract quality employees. It’s also perfect for getting them invested in the success of your business early on. Think about it, offering equity to employees at your startup means that they have a genuine interest in making your business as successful as possible, as soon as possible.
In addition, offering stock options to employees means that you can keep back some of your cash, allowing you to spend it on the business. New businesses usually require you to basically throw money at it until it can stand on its own, so it’s best to save what you can, where you can.
Offering employees equity also generally means a lower turnover rate. As mentioned before, employees with stock options get invested in helping your business succeed, and are far less likely to leave. Minimizing employee turnover is a great benefit for any business.
Cons of Offering Equity to Employees
Perhaps the biggest con to offering stock options to employees at a startup is that it is almost always complicated. It’s highly advisable to consult a business attorney before giving away any equity in your company.
Some of the potential complications include:
- Future tax issues if done incorrectly
- Complications when selling the business
- Accidentally giving too much equity away
- State law may require all shareholders have access to company records, including finances
Talk to a Monmouth County business attorney today about setting up an equity-based employment compensation plan that will ensure both you and those you hire get everything you want.