Equity Incentive Plan

An Equity Incentive Plan (EIP) is the board-approved and shareholder-approved document that authorizes the company to grant equity-based compensation to employees, consultants, and directors. It governs the universe of terms applying to those grants (option types allowed, maximum shares authorized, vesting structures, exercise mechanics, termination provisions, change-of-control treatment) and is legal infrastructure required before any equity grants can be made. It's the legal foundation underlying every equity grant.

The contents:

Plan administration:

• Board (or committee) administers the plan.
• Determines who gets grants, sizes, terms.

Eligible participants:

• Employees (incentive stock options or NSOs).
• Consultants and directors (NSOs only).

Types of awards permitted:

• Incentive Stock Options (ISOs).
• Non-qualified Stock Options (NSOs).
• Restricted Stock Awards (RSAs).
• Restricted Stock Units (RSUs).
• Stock Appreciation Rights (SARs).

Shares authorized:

• Total shares available for grants under the plan.
• Often 10-20% of fully-diluted at outset.
• Increases require shareholder approval.

Vesting framework:

• Default vesting (typically 4-year with 1-year cliff).
• Acceleration provisions.

Exercise provisions:

• Exercise period (typically 10 years for ISOs).
• Early exercise allowed or not.
• Post-termination exercise period (typically 3 months).

Change of control:

• Treatment of options at acquisition.
• Acceleration provisions.

Termination provisions:

• Treatment of vested vs. unvested at departure.
• Cause vs. without cause.

Why have a formal plan:

Legal requirement: ISOs can only be granted under shareholder-approved plan (IRS rule).

Rule 701 compliance: federal securities exemption for employee equity requires plan structure.

State securities compliance: state blue sky laws require plan registration in some states.

Tax treatment: proper plan structure enables favorable tax treatment for participants.

Administrative efficiency: standardized terms reduce per-grant negotiation.

The plan lifecycle:

Initial adoption: at incorporation or shortly after.

Initial pool size: 10-20% of fully-diluted.

Pool refreshes: investors typically require pool expansion at each round to maintain 10-20% available.

Plan amendments: as needed (often at IPO conversion).

Plan expiration: typically 10-year term; renew before expiration.

Common pool sizes by stage:

Pre-seed/seed: 10-15% of fully-diluted.

Series A: 15-20% post-money (expanded as part of round).

Series B+: 10-15% post-money (expanded as part of round).

Pre-IPO: 10-15% post-IPO.

Ryan's Take

Equity Incentive Plan is required legal infrastructure for any company granting equity to employees. The discipline: adopt EIP at or shortly after incorporation; size pool appropriately (10-15% pre-seed, expand at each round); use standard plan template (Cooley, Wilson Sonsini, Goodwin all have good ones); refresh through plan amendments rather than creating multiple plans. The cost of getting this right is low; the cost of granting equity without proper plan structure is high (tax issues, securities issues).

What founders get wrong: Granting options before adopting an EIP, then having retroactive cleanup. Or adopting EIP but never refreshing pool, then running out of shares mid-hiring. The right discipline: EIP at formation; proper pool sizing; refresh at funding rounds.

Related: [Option Pool] · [Stock Option] · [RSUs] · [Employee Equity] · [Vesting]

FAQ

What is an Equity Incentive Plan? The formal plan document (board-approved and shareholder-approved) that authorizes the company to grant equity-based compensation (stock options, RSUs, restricted stock) to employees, consultants, and directors. Required legal infrastructure for equity grants.

Why do startups need an EIP? ISOs require shareholder-approved plan (IRS rule). Rule 701 federal securities exemption requires plan structure. State securities compliance requires plan registration. Proper tax treatment requires correct plan structure. Administrative efficiency from standardized terms.

What does an EIP cover? Eligible participants, types of awards permitted (ISOs, NSOs, RSAs, RSUs), total shares authorized, vesting framework, exercise provisions, change-of-control treatment, and termination provisions. Standard plan templates available from major startup law firms.