What is Equity Incentive Compensation Plan?

Whenever a company issues equity or gives a promise to do so in the future, such activities are considered an offer of investment opportunities and therefore fall under the regulation of the federal and state securities laws. The basic idea is that the shares cannot be offered or sold if they are not registered with SEC and in certain cases with state regulatory authorities. This issue is reviewed in greater detail in the section Financing a Business on this site.

 

Shares offered to the employees as compensation for their work may be exempt from registration provided that other legal requirements are satisfied. A well-developed equity compensation package is one of this. The initial and main governing document in the equity compensation package is Equity Incentive Compensation Plan. The purpose of this Plan is to state what types of equity compensation may be granted any time in the future, what restrictions will apply, how the Plan will be administered by the company and all other elements that are relevant to each equity compensation structure. Based on the terms and conditions contained in this Plan all other subsequent agreements and documents will be developed.

 

Equity Incentive Compensation Plan is a pretty extensive document. If some form of the compensation is not included in the Plan, it cannot be granted. Of course, the Plan can be amended, but it should be done before the grant of the equity. The Plan comes first, the grants afterwards. Usually attorneys provide a short document to the startup owners together with the Plan – an executive summary of the key provisions of the Company's Plan. It can serve as a quick reference for future use.

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