Equity & Incentive Compensation Arrangements for Employees of Startups

This practice note provides a brief introduction to the equity and incentive compensation plans and agreements that startups often use to attract and retain key personnel. To effectively advise startups, and the investors that frequently finance them, it is imperative to understand startup equity and incentive compensation structures, and why and how they may differ from those offered by more mature companies. The following is a general discussion of compensation practices of investor-backed, Kickstarter-funded, and bootstrapped startup enterprises, where the founders’ intended trajectory is to quickly grow the company (and its value) in the hopes of an exit or liquidity event via an initial public offering (IPO) or sale. It is a world of short- to mid-term time horizons where investors (and founders and senior executives) demand significant growth and substantial returns. This is distinct from the mentality driving many new small businesses or family-owned businesses. It is also different than the approach often adopted by more mature private and public companies. One important distinction between mature enterprises and startups is that startups frequently have much less cash available to compensate employees and instead rely more heavily on equity-based compensation arrangements…