Employee equity compensation is an irreplaceable hiring and retention tool these days. Apart from preserving precious cash reserves of a company that would otherwise be allocated for regular cash-based salary packages, equity compensation also acts as an important enhancer of employee performance. However, one rule cannot apply to all employees in an organization. This is why an easy go-to template for diverse equity distribution saves the day.
SEED by Eqvista
When a startup is founded, all shares are distributed among founders. But as the business expands, investors and other stakeholders come on board, and eventually, the company reaches a point where equity must be extended to employees as well. At this stage, founders must realize that employee equity compensation is a cumbersome task and can quickly get out of hand. In this situation, SEED by Eqvista can be a perfect solution. Let’s see how.
What exactly is SEED by Eqvista?
Before exploring SEED, let’s see how Eqvista simplifies equity distribution needs. Eqvista is one of the leading equity management software. The sophisticated features of this software allow end-to-end management of a company’s diverse equity needs. Consolidating years of experience in delivering optimized solutions for varied equity distribution processes, Eqvista has introduced SEED or the Simple Employee Equity Development plan that addresses the most crucial aspect of employee equity compensation – vesting schedules.
Vesting for employees is a cornerstone in the process of crediting company stock. A vesting schedule is a simple timeline that indicates when stocks will be credited to an employee. A typical vesting period is between 3 – 4 years with different conditions pre-set for stock vesting. These conditions are usually time based and performance-based. As one can imagine, a growing business engages employees of diverse experience and skill-sets to run their operations. Thus it is very difficult to individually track vesting requirements for each employee. Based on Eqvista’s years of expertise and client feedback, a standard vesting template known as the Simple Employee Equity Development plan or the SEED was introduced.
How SEED by Eqvista helps companies?
SEED by Eqvista is unique because it is a well thought out comprehensive plan. The vesting schedule template laid out in the Simple Employee Equity Development plan is designed to cover all categories of employees across different company sizes. Based on the nature of the business, it can be customized as well. The three important reasons why SEED by Eqvista is a reliable employee equity reward solution are:
- Caters to all stages of business: Based on the number of employees, SEED by Eqvista categorizes companies into 8 different groups:
- Startup formation (0-9 employees)
- Startup validation (10-19 employees)
- Startup growth (20-49 employees)
- Small (50-99 employees)
- Small-medium (100-199 employees)
- Medium (200-299 employees)
- Medium Large (300-399 employees)
- Large (400-499 employees)
Depending on the stage of businesses, companies must offer the right type of vesting for employees to keep them motivated. Strategies that suit a company with 0 – 9 employees will not work for medium or large companies with more than 500 employees. In the initial stages, it is all about talent engagement and keeping them connected to the growing business. While in the later stages, the focus is on performance milestones. SEED is specially designed to accommodate this whole range of vesting requirements.
- Caters to all levels of employment: SEED by Eqvista categorizes levels of employment into three: Entry-level, Medium-level, and Senior-level. This bifurcation is important because employee equity compensation is based on performance. Moreover, a certain sense of trust and reliability has to be set in the employer-employee relationship before parting with company stock. An entry-level employee is new to the company and not much can be said about their work experience except for what is on their profile. While senior-level recruitment happens after serious vetting of their performance records. Thus the extent of stock options that can be allotted to a senior-level employee is not the same as for the fresher.
- Options for employee pool: When a startup is founded, all shares belong to the founders. Thus to extend company shares to people beyond founders, an option pool must be created. All share allocations and retractions happen from this ‘options pool’. Option pool cannot be a fixed entity. SEED by Eqvista accommodates this flexibility. SEED proposes a 10%-15% options pool for startups in the formative stage. Once the company begins to grow and expand, the same options pool can be expanded to 20%. This allows for a flexible employee equity compensation scheme without shaving off too much equity holdings from the founders right from the start.
What equity types can be used in the SEED plan?
Employee equity compensation is globally a highly regulated activity. A company cannot simply allocate some shares to an employee and neither can an employee receive company stock without proper documentation. There are different ways and means of company share allocation. Here the three types of equity rewards prescribed in the Simple Employee Equity Development plan by Eqvista:
Stock options as the term suggests, are the options granted to buy company stock at a pre-determined price, at a later date. The stock price set in advance is also known as the ‘exercise price’. Stock options are not stocks as is. It is the right to purchase stocks. Once the stock option holder exercises their options, they become a shareholder. Stock options can be granted to employees as well as external stakeholders. This type of employee equity compensation is of two types:
- Non-qualified stock options: Otherwise referred to as NSOs, these options do not have any limits in their grants. These are known as non-qualified because they do not meet all the requirements of the Internal Revenue Code. NSOs are an expensive option for employees because it is taxed twice – at the time of grant as well as exercise.
- Incentive stock options: Otherwise known as ISOs, this type of grant is limited to 100K per year. They are granted only to employees and work to their advantage as they are taxed only once – at the time of sale.
This category of employee equity compensation is directed towards senior executives. They are granted in bulk and come with set restrictions to prevent any chances of foul play. These restrictions are designed in a way that the grantee cannot enter into a premature sale just after receiving stocks. Restricted stocks are also known as ‘letter stocks’ or ‘section 1244 stocks’. They are always subjected to graded vesting schedules and non-transferable. The two types of restricted stocks are:
- Restricted stock units or RSU: These function similarly to stock options. They are not actual stock, but the rights to receive stocks at a pre-determined price at a later date. Though senior executives are granted restricted stock units, they do not become shareholders with voting rights unless they have exercised their options.
- Restricted stock awards or RSA: These are actual stocks. The receiver owns RSA stocks from the time they are granted. These are normally used as a sign-on bonus when a senior executive is hired.
This category of employee equity compensation is based on performance milestones. Certain metrics such as EPS, return on equity, the total return on company stocks, etc. are used to measure the performance standards of an employee. While granting these shares, the company decides on the benchmarks that an employee is required to achieve to qualify for these shares.
SEED Vesting Schedule Template
The vesting schedule template used in the SEED plan by Eqvista uses a combination of all the three types of equity rewards discussed in the previous section. Let’s see how these are distributed based on company size and staff position:
SEED vesting schedule template:
|Staff||Startup Formation||Startup Validation||Startup Growth||Small||Small-Medium||Medium/Medium Large/Large|
|Entry Level Staff||100% TB||100% TB||100% TB||100% TB||100% TB||100% TB|
|Mid Level Staff||100% TB||100% TB||100% TB||90% TB/10% MB||80% TB/20% MB||70% TB/30% MB|
|Senior Level Staff||100% TB||100% TB||90% TB/10% MB||80% TB/20% MB||70% TB/30% MB||60% TB/40% MB|
After choosing how the equity will vest based on your company and staff position, you can select the vesting length and timing.
|Startup Formation||Startup Validation||Startup Growth||Small||Small-Medium||Medium/Medium Large/Large|
|3 Years, Annual||3 Years, Annual||3 Years, Annual||3 Years, Annual||3 Years, Annual||3 Years, Annual|
|-||3 Years, Cliff + Quarterly||3 Years, Cliff + Quarterly||3 Years, Cliff + Quarterly||3 Years, Cliff + Quarterly||3 Years, Cliff + Quarterly|
|-||3 Years, Cliff + Monthly||3 Years, Cliff + Monthly||3 Years, Cliff + Monthly||3 Years, Cliff + Monthly||3 Years, Cliff + Monthly|
|-||-||4 Years, Annual||4 Years, Annual||4 Years, Annual||4 Years, Annual|
|-||-||4 Years, Cliff + Quarterly||4 Years, Cliff + Quarterly||4 Years, Cliff + Quarterly||4 Years, Cliff + Quarterly|
|-||-||4 Years, Cliff + Monthly||4 Years, Cliff + Monthly||4 Years, Cliff + Monthly||4 Years, Cliff + Monthly|
Based on company’s size
This is how equity rewards distribution looks like in the Simple Employee Equity Distribution plan by Eqvista. For startup stage companies with employee categories 0 – 9 and 10 – 19, employee equity compensation is suggested to be granted as 100% time based (TB). For growing companies with expanding workforce a combination structure of time based vesting and milestone based (MB) vesting is suggested. However, the percentage of time based vesting is always on the higher side.
Based on staff position
Meanwhile, based on the three categories of staff positions prescribed in the vesting schedule template of SEED by Eqvista (entry-level, medium level, and senior-level staff) equity rewards are designed to suit individual needs. SEED suggests granting Entry level staff 100% TB for all company sizes. The same goes for medium-level employees except when the company size exceeds 50 personnel. After this point performance, Milestones are introduced ranging from 10% to 30% in addition to time based vesting. This could be more depending on the expanding company size. The same applies to senior-level staff where milestones are introduced right from the time a company size crosses 20 employees.
SEED by Eqvista – Based on Industries
Now that we have a clear idea about what the Simple Employee Equity Development plan is, in this section, we demonstrate how SEED can be customized to suit employee equity compensation schemes for a range of industries.
Mining, Quarrying, and Oil and Gas Extraction
The mining, quarrying, oil, and gas extraction industry is the powerhouse of human civilization. They are a sub-sector of Natural resources and mining operations. They deal with the extraction and processing of naturally occurring elements to make them suitable for power generation processes. Employees in this sector work 45 hours a week. Here is how Eqvista’s SEED is customized for the mining sector.
The utility industry regulated by the US Public Utility Commission is the backbone of the day-to-day energy-related activities of every citizen. This sector handles the last-mile delivery of essentials such as electricity and water supplies regulated by the government. Three types of companies handle these services – For-profit, city-owned, and rural cooperatives. Here is how Eqvista’s SEED is customized for the utility sector.
The construction industry deals with all brick and mortar establishments for personal and industrial use. This is a labor-intensive industry and employs both skilled and unskilled personnel. Based on their sectors of operations, this industry is divided into two: private and public sectors. The private sector is funded by individuals and private companies while the public sector is government-funded. Here is how Eqvista’s SEED is customized for the construction sector.
This is one of the fastest-growing industries globally. The manufacturing sector is responsible for converting natural resources into finished goods fit for human consumption. The skills of the manufacturing sector are focused on producing these necessary items on a large scale. Most of the companies in this sector are privately run with very few funded by the government. Here is how Eqvista’s SEED is customized for the manufacturing sector.
The wholesale trade industry is an important link between manufacturers and retailers. They play a crucial role in inventory management and ensure a smooth supply chain at all times. They handle both perishable and non-perishable items and provide technical assistance in terms of repair and installation as well. The wholesale industry thus has to employ a range of skilled and unskilled labor at various nodes of operations. Here is how Eqvista’s SEED is customized for the wholesale trade sector.
The retail trade industry is the last leg in the supply chain. Companies in this sector ensure product availability to end consumers at all times. The beauty of retail trade lies in the unified accessibility of products and services from across geographies. A consumer is never limited to choice. Companies in retail trade either operate as individual stores or franchises. Here is how SEED is customized for the retail trade sector.
Transportation and Warehousing
This industry is the link between producers and suppliers. They ensure that all products (perishable and non-perishable) are transported with utmost care and housed scientifically without compromising their value or quality. Their services span cargo as well as people. Transportation includes roadways, railways, waterways, airways, and pipelines while warehousing is all about storage and maintenance. Here is how SEED is customized for the transportation and warehousing sector.
IT and Technology
The information technology sector is one of the most highly skilled ones in the world. Close to 12 million people are employed in this sector in the US alone. The United States is also the global leader in the software and services industry. Companies in this sector create and supply customized software solutions that are integral to most global operations. Here is how SEED is customized for the IT and Technology sector.
Finance and Insurance
This sector runs the global economy. Companies in the finance and insurance sector are single-handedly responsible for all personal and business finances. They create financial products that enable an exchange of money between stakeholders. This included cross-border transactions as well. Some of the important players in this sector are banks, insurance companies, investment houses; etc. Here is how SEED is customized for the finance and insurance sector.
Ready to start a SEED plan for your company?
As we see, the SEED plans by Eqvista is a unique vesting schedule template that has the capacity to accommodate the needs of diverse industries globally. In addition, Eqvista’s experience as the leading equity management software allows possibilities of pioneering innovations in the exciting SEED plans. These articles provide a comprehensive insight into our services, including cap table services and company valuations. For more information reach us today.