My company IceBreaker is beginning to gain traction and grow at a faster rate than I had anticipated. I want to begin to bring on new employees to help with various functions of the business however we still do not have enough capital to compensate them monetarily quite yet. What are some of my options in terms of bringing employees and interns on at this stage of our business in terms of compensation.
This is a complicated question that likely requires legal advice particular to the startup. However, compensating employees at a seed stage typically takes the form of stock options or restricted stock units (RSU)s.
Stock options essentially give you the right to buy shares at a certain price (“strike price”) after a vesting period - typically, after your one-year anniversary date, with 25% transferred to you each year over a four-year period. The key here is that you must purchase the options. Your hope is that by the time you’re eligible to buy the options, the stock has appreciated. However, stock value could have eroded making it worthless, which doesn’t happen with RSUs.
RSUs are a relatively new financial creature. Similar to options, there’s a vesting period where the employee must satisfy certain conditions before the stock or its value is transferred (typically, there’s a period of time and other conditions - e.g., work performance). Unlike stock options, there’s no purchase involved. Instead, a certain number of units are allocated - or granted - to the employee, but there’s no value/funding until after the employee has satisfied the vesting requirements.
As always, please understand this answer is not offered as advice, but only to provide general information. Since there are many considerations involved with the complexities of these transactions, you really need to have personalized advice specific to your circumstances. Please check out LawTrades (www.lawtrades.com) and connect with an experienced startup attorney for additional guidance about evaluating equity distribution.