With little cash coming in the door and debt accumulating, startups do not have the means to pay big salaries to attract top tier talent and add to their headcount. That is why startups should consider adopting a stock incentive plan to compensate and motivate employees, contractors, and advisers with stock instead of salaries. Although it may mean “working for free” for now, talented employees will be enticed by the idea of owning a piece of the startup because it could mean a big pay off later when, and if, the startup has a successful initial public offering or is acquired. Although the employee, contractor, or adviser may feel like they are “working for free,” the IRS disagrees.
When discussing intellectual property (IP) with founders, I get two very different questions from founders, and both questions have the same answer. The first question is, “This IP is my baby, can I keep it instead of giving it to the company?” The second is, “Can’t we worry about IP later?”
The answer to both questions is always “no” if you aspire to obtain venture capital investment to grow your company. Venture funds will take a hard pass on any startup that does not own or has not taken steps to protect its IP.
Many startups are born when a few friends pull together behind an idea and build the beginnings of a business as a small, agile team. But a group of friends can bring a business only so far; hiring to grow the team is inevitable.
Startups usually begin with a small group of founders, and they may not hire employees for months or even years after forming. So you might think a stock incentive plan — usually considered a motivational tool for employees — is something a startup can wait to set up until the venture is ready to hire. In reality, a stock incentive plan is a powerful tool founders can use to incentivize employees, advisors and contractors, so a startup should adopt a stock incentive plan as soon as it is formed. What is a Stock Incentive Plan? Cash-poor startups with no revenue don’t have the means to pay employees attractive salaries, but they can make up for the lack of cash by paying for services with its shares. You will be surprised by how many people are willing to work for equity because of the allure of the prospect of a big payoff down the road when the startup sells or goes public. A stock incentive plan, or stock option plan, creates a method to dole out shares as compensation as soon as the advisor, employee, or contractor starts providing services. Also, you can keep these persons engaged with time-based vesting, so … Read more