TODAY ON REASONED REFLECTIONS:

• Equity Incentive Plans for Startups;

• Startup News 🚀;

• Venture Capital News 💰;

• Other Tech News 💻.

Reflection No. 1: Equity Incentive Plans for Startups

Equity incentive plans (also referred to as stock option plans or ESOPs) are a tool startups can use to attract and retain top talent. As we all know, most startups have limited cash flow, so offering equity to a potential employee, advisor, director, or consultant (aka service provider) allows early-stage companies to attract and retain talent. If all goes well, the equity the service provider receives can be a lucrative compensation structure. If things don’t turn out, at least you had a chance to make a large sum of money…

The content of this Reflection applies to startups that are C-corporations.

I - Issue: What’s an equity incentive plan (EIP), and what are some common things to know about EIPs?

R - Rule: Equity incentive plans allow early-stage companies to grant equity to service providers—typically via stock options or restricted stock—while saving on actual cash compensation.

A - Analysis: An equity incentive plan is a structure where a percentage of the company’s common stock is reserved to award equity to the company’s service providers. Offering equity has a couple of immediate benefits. First, the interests of the service providers are now aligned with the company’s stockholders—increasing the company’s value. Second, the company saves on cash compensation and can preserve that cash for the business.

The following are a couple of essential things to remember when it comes to equity incentive plans:

• The company’s board of directors must approve the EIP to implement an equity incentive plan successfully. Additionally, the company should also have its stockholders approve an EIP within 12 months to take advantage of Rule 701 (a securities exemption) and IRC 422(b)(1) (a tax benefit).

• Generally, a corporation can grant awards that give the recipient the full value of the underlying shares (restricted stock, restricted stock units, or phantom stock awards) or awards that provide the recipient the appreciation in share value after the grant date (stock options or stock appreciation rights (SARs)). The two most common award types are restricted stock grants and stock options.

• The shares reserved under the EIP don’t dilute existing stockholders until those shares are actually issued to service providers. This is where the difference between percentage ownership on an “outstanding basis” and “fully diluted basis” comes in. If your cap table consists only of the founding team, you ultimately control whether any dilution occurs (since the founders are presumably the only stockholders and directors).

• As mentioned above, the two most common award types are restricted stock grants and option grants. Restricted stock grants dilute existing stockholders when the grant is made. In contrast, option grants dilute existing stockholders when the recipient exercises the option and those underlying shares are issued.

C - Conclusion: Equity incentive plans are a valuable tool for startups to preserve cash for the business and attract top talent.

Startup  🚀, Venture Capital 💰, and Other Tech News 💻

• Carta’s State of Startup Comp

  Summary: Although cash compensation has remained flat, equity compensation has declined steadily over the past year and a half. This downward trend has also affected all job levels and functions. Lastly, as venture deals have become more selective, valuations have decreased, resulting in option repricings.

• Seaya closes new climate tech fund

  Summary: Seaya recently closed a €300 million climate tech fund which will invest in growth companies focused on climate change. The new fund intends to make 25 investments by the end of 2027 and has already made five investments.

• Malta—the AI hub

  Summary: Malta—a small island nation in Europe—is positioned to be a key player in the AI industry, with its eyes set on becoming an AI hub in Europe. The country is already attracting global tech companies and startups through government support and strategic investments in technology infrastructure.

Quote of the Reflection

Thanks for following along! Going forward, we will continue to analyze topics related to startups, venture capital, and tech every other week. If you want to see a topic featured on Reasoned Reflections, please email [email protected].