How to put an equity agreement in an employment contract

Equity incentives are a powerful tool for attracting and retaining top talent. But for many small businesses, creating an employment contract that includes equity can feel complex and daunting.

In this article, we’ll break it all down and explain how you can cover equity in your contracts. Specifically, we’ll discuss how to lay out the terms, conditions, and definitions of your equity incentives, how to ensure your contract is legally compliant, and how the right tools and support can simplify the entire process.

So let’s jump straight in.

Why offer equity in your employment contracts?

If you’re wondering if offering equity is worth all the hassle, consider that it isn’t just for startups looking to disrupt industries; it’s a proven incentive that helps companies of all sizes attract top talent.

Equity gives your employees a vested interest in your company’s success and growth, aligning their long-term goals with those of your organization. For small businesses especially, this can level the playing field when competing for talent against larger, cash-rich companies.

Key benefits of offering equity include:

• Improved motivation and engagement. Employees are more invested when they know they share in the upside of your company’s success.

• Cash flow efficiency. Equity allows your business to conserve cash, which is especially helpful for early-stage companies.

• A competitive edge. Equity can differentiate your business in a competitive talent market by offering employees a stake in your growth.

What type of equity incentives can you include in an employment contract?

This depends entirely on how you want to incentivize your team, as well as where you — and your employees — are based.

Many companies prefer to offer stock options, which gives employees the chance to purchase shares at a set price (usually after a vesting period). This structure encourages employees to stay and grow with your company until they reach the vesting milestone.

Depending on where your company is based, you may alternatively offer:

• An employee stock ownership plan (ESOP), where stock is granted to your employees at no cost

• An employee stock purchase plan (ESPP), where employees purchase stock directly out of their salary (usually on a monthly basis)

• Stock appreciation rights, which are cash bonuses tied to the value of your company’s shares

If your prospective team member is in a different country, things can become more complex. This is because the laws around equity incentives in that person’s country may be different to yours.

In instances such as this, it’s highly recommended to work with a global equity incentives partner, like Remote Equity. This ensures that what you offer in your contract is fully compliant with all relevant tax and employment laws, and that it’s fair for all your team members. It also means you don’t need to work with multiple third party providers in different countries.

Learn how to offer equity incentives to a global team

Unpack the complexities and compliance challenges, and see how you can easily offer stock options to your team members - wherever they're based.

Get your free guide

What are the main components of an employment contract with equity?

When you draft an employment contract that includes equity incentives, you need to ensure you do the following:

Define the equity package

Outline the type of equity, and the number of the shares or options (if relevant). Provide a transparent breakdown of how the equity value is calculated.

Set out the vesting conditions

If your incentives are subject to vesting, detail the vesting schedule (including any cliffs), and outline any conditions that impact vesting (e.g., whether equity is forfeited if the employee leaves the company before vesting is complete).

Clarify rights, responsibilities, and buyout clauses

Define your employees’ rights and responsibilities around their equity. Include clauses on what happens in the event of buyouts or company restructuring, as these events often affect equity and ownership.

Note that the employment contract itself is not the same as an equity agreement, which is usually a separate document. Remote Equity can help you draft equity agreements and streamline the numerous associated legal processes, saving you time and money.

Legal and compliance considerations

As mentioned, equity incentives require you to adhere to various legal and tax regulations, especially if you’re offering them to a global workforce. You also need to understand the impact — positive and negative — that each type of incentive can have on both your and your employees’ tax obligations.

Taxation on equity varies by country and often includes income tax, capital gains tax, or both. In the US, for example, incentive stock options (ISOs) can provide tax advantages if held for specific periods, while non-qualified stock options (NSOs) may be taxed at ordinary income rates when exercised.

To confuse matters, you can not offer ISOs if you’re hiring through an employer of record (EOR), but you can for NSOs. This is why it’s important to work with an expert like Remote Equity, who can guide you through all these complexities and simplify everything.

This is also true if you have (or plan to have) employees in multiple countries. Equity regulations differ widely, and compliant administration is essential to avoid legal risks.

Setting fair equity levels

As touched upon, fairness is an important part of equity incentives. If your program is deemed to benefit some individuals more than others, this can be demotivating and have the opposite effect.

As a result, you should use benchmarking to compare equity offers for similar roles in your industry. Many companies look at role and seniority, as well as how critical the position is to future growth.

In general, you should aim to:

• Align the incentives with role and experience. Employees in senior positions often receive more equity, as their influence on company growth is more substantial.

• Consider your company’s growth stage. Early-stage companies tend to offer more equity to compensate for higher risk, while more established businesses can offer less as stability increases.

Either way, transparency is crucial when discussing equity. Share the reasoning behind your allocations and keep your employees informed about the company’s valuation. This helps your team members understand the potential value of their shares.

Managing equity incentives with Remote

Managing and documenting equity incentives, particularly across different countries, is complex and confusing. This is why it’s so advisable to work with an experienced equity incentives partner, like Remote Equity, which can take on all the heavy legal lifting and allow you to concentrate on identifying the best talent and growing your business.

We can help you draft a stock options plan, while enabling you to:

• Grant (and manage) equity to global employees (and contractors!) in seconds (compared to an average of three months with legal firms)

• Remove the risk of costly fines and legal penalties, and ensure full compliance with local tax and documentation laws

• Save money and avoid costly third-party and manual processes

• Better educate your team members on the true value and implications of their stock options

To learn more about Remote Equity — and how we can solve your equity incentive headaches — speak to one of our friendly experts today.

Offer stock options to your global team with Remote Equity

Our team of equity experts guide you every step of the way, from planning to tax withholding, offering, and reporting.

Get started nowSchedule a demo