When Equity is Offered, Get it in Writing!
With this post, the third in a series of common start-up compensation mistakes, we address the concerns regarding (the lack of) documentation.
Start-ups, by their very nature, often move at warp speed and proper documentation is frequently a victim of management going too fast and employees not asking the right questions.
This is especially true when it comes to offers of equity at the time of hire.
We’ve seen this one too often. A start-up company offers an executive equity and the only thing behind the offer is a handshake or maybe an employment offer letter.
This isn’t nearly enough.
If you are that new hire…get it in writing; and if you are the company owner you should have a well-defined equity offer.
- Start with an Offer Letter that clearly cites the fact that an equity vehicle is part of the terms of employment
- Develop a Stock Option Plan that spells out the number of shares being offered and what percentage of ownership they represent; the vesting period, termination before vesting, accelerated vesting, exercise price and how it is derived (e.g., from a third party or by a market event)
- Create a Shareholder Agreement that stipulates shareholder rights and covers items such as tag-along and drag-along rights.
Offer letters, stock option plans and shareholder agreements are key documents that deserve to be thoughtfully conceived and written by owners and thoroughly reviewed and understood by new hires. They are also financial and legal documents that should be prepared and reviewed by professional advisors.