The economy is booming in 2018, and scores of entrepreneurs in Florida are starting up new business enterprises this year. Many of these startup businesses will recognize their first employees for taking a chance with a new company by rewarding them with some equity.
However, a company may choose to do it, issuing equity to employees is a complicated procedure. It can raise a number of complicated tax and legal issues. This is where a business formation attorney comes in.
WHY WILL A NEW BUSINESS NEED AN ATTORNEY’S HELP?
Startups are not easy. If you are an entrepreneur who is starting up a business in Florida, you will face a number of questions, issues, and expenses that must be handled the right way.
Any time that someone starts up a new company, the number of details to remember and decisions to make can feel almost overwhelming.
There is no easy way to manage everything that a new business owner will be responsible for, but in this state, it will be imperative for that new business owner to have the guidance of an experienced Central Florida business attorney.
Every business is unique. If you are starting up a business anywhere in Florida in 2018 or beyond, you are going to need the personalized services, insights, and sound legal advice that a reputable and trustworthy business lawyer will provide.
An attorney who has substantial experience advising and representing business owners can ensure that the best interests of your company and your employees are fully legally protected.
WHAT’S THE BEST WAY FOR A COMPANY TO ISSUE EQUITY TO EMPLOYEES?
How a Florida business owner should handle the issuance of equity to a company’s first employees will hinge on the company’s particular circumstances and the answers to the following three questions.
Below, you will learn how the answers to these questions will affect the way that a business issues equity:
1. What are the long-term goals of the business?
2. How old (or young) is the business?
3. What is the business worth?
WHAT ARE THE LONG-TERM GOALS OF THE BUSINESS?
Is your business on track for rapid growth and an IPO? Or will it stay private and grow slowly and incrementally? The answer needs to be taken into account when you determine how to provide equity to your earliest employees.
The options available for issuing equity compensation will depend on whether your business is a limited liability company (LLC), a C corporation, or an S corporation. Corporations more often issue equity to their employees, but LLCs also have ways to issue equity.
Corporations usually provide equity through stock options or restricted stock. With both methods, there are usually restrictions on how the stock may be transferred or sold. Of course, when the company is sold or goes public, employees may then sell their shares.
HOW DO LLCs SHARE EQUITY?
Obviously, in a limited liability company, other arrangements for issuing equity have to be made. Limited liability company owners often reward employees with some type of profit-sharing.
The most common approach to sharing equity in an LLC is to share “profits interests.” A profits interest is comparable to a stock appreciation right.
While it is not precisely a profit share, a profits interest is instead a share of the rise in the value of the LLC over a specified period of time.
Equity compensation is more common in corporations, so the answers to the next two questions will focus on how (and when) a corporation should issue equity to employees
HOW OLD (OR YOUNG) IS THE BUSINESS?
How well-established is the company? When you decide what type of stock compensation to issue, you should take into account whether the business just started or if it has already been in operation for several years.
In a company’s earliest stages, the least expensive and easiest way to issue equity is with restricted stock.
When you are still building your company with the original personnel, restricted stock is superior to stock options as a motivational tool.
Restricted stock makes the holder an owner of the business when the stock vests, unlike stock options that do not entitle the holder to ownership until the option is exercised at a future date.
However, if your company is well-established, has revenue, or has raised significant investment money, you may decide to go with stock options when you reward your employees.
WHAT IS THE BUSINESS WORTH?
As your business increases in its value, using restricted stock to reward employees becomes a less attractive option. For a flourishing company that is making good profits, establishing an option pool is the most common choice for issuing equity to employees.
To create an option pool, the business sets aside fifteen or twenty percent of its outstanding shares so that those shares may be issued to employees in the future as part of a stock option plan.
If you are the founder and owner of a startup in Florida, offering equity to your first employees can be a superlative motivational tool. But you must take into account the advantages and disadvantages of the various ways that equity can be distributed.
However you choose to do it, there will be considerable tax consequences for both yourself and your employees. You must be careful to adhere to all of the state and federal financial laws and regulations, or you – and potentially even your employees – could face tax penalties.
IS IT IMPORTANT TO HAVE A WRITTEN BUSINESS PLAN?
If you plan to start up a business in Florida, creating a business plan in writing – before you do anything else – could be a genuine key to success. A proper plan defines your business, its mission, its goals, and its operating procedures.
A business attorney can help you draft a workable business plan that satisfies your goals and protects your interests.
With a trustworthy business attorney representing you and your business, you can know that your company’s legal matters are handled properly.
IN WHAT OTHER WAYS CAN A BUSINESS LAWYER HELP?
A good business attorney will protect your company’s intellectual property, help you draft and negotiate contracts, and represent you as your corporate registered agent.
As a business owner, you already know that you must have reliable legal advice from an experienced business lawyer who can help you put solutions in place before legal problems arise.
Your business isn’t a hobby. Get the legal advice that you need. It’s only a phone call away.