This means that startups need to offer something that provides them with some unique edge, both to bring in highly skilled people, but also to provide benefits as the company grows.
This is referred to as offering Startup Equity, and while this provides an alternative to cash which may be in short supply, the area is a uniquely complex one, especially when issuing it to new members of staff.
Startup Equity split
Splitting equity between cash and stock allows companies to offer both a competitive salary and a stock option package.
The different kinds of equity: US terms
Regardless of the position of an employee, conferring equity encourages a commitment to the best interests and success of the company. But knowing the right type of startup equity structure to offer is essential.
1 - Founder Stock: This form of stock is commonly issued to founding members.
2 - Restricted Stock: This stock is issued to employees when the company is founded. Restricted stock offers preferable tax treatment for its holders.
3 - Stock Option: This allows employees to purchase stock in the company at a set value, referred to as a 'strike price'.
4 - Restricted Stock Units: Restricted Units are a newer option which requires a sizeable outside investment, such as from an Initial Public Offering (IPO).
Vesting stock is a method in which equity is earned over time. This startup equity agreement is usually undertaken over the medium to long-term, such as four years, acting as a way to fully vest employees and encourage longer retention. Those that leave before their stock vesting schedule is over will only receive a percentage of the stock equity that they have.
The number of shares also denote the level of entitlement the employee has to annual dividend yields, and to vote in business affairs, depending on the company's scale.
Understanding the different kinds of stock: UK terms
Not all types of stock are created equal, each with conditions that offer the shareholder with critical entitlements.
1: Ordinary Shares: These shares offer the full range of rights to the shareholder, including annual dividends, voting during shareholder meetings and entitlement to capital if the company enters liquidation.
2: Preference Shares: These are specific to the issuing business, but provide its shareholders with dividend yields on the number of shares they own, though they do not have the right to a vote during shareholder meetings. These shares can also have their dividend capital divided into segments which denote their value. Classifications like A, B and C are used to differentiate these shares in terms of dividend value or annual yield.
3: Alphabet Shares: Alphabet shares refer to the level in which different classifications of shares are issued to employees depending on their position within the company or their performance. The precise benefits of alphabet shares depend on the company issuing them, and become increasingly complicated in the percentage of dividend yield they offer, or whether specific grades provide voting rights or not.
There you have it, there's lots to say so we've tried to keep it simple and fairly brief.