If you’re needing to hire a project leader for your startup, you’re probably going to want to grant them some equity.
Figuring out how much this should be can be an arduous task. Although there are no hard and fast rules, an excellent guideline is that a project leader who has come in at an early stage should get a one to two percent equity grant.
In this article, we’ll cover these three main points:
- What startup owners need to know about equity grants
- Equity grant terminology
- The most common types of equity grants
How project leaders and project managers are different
Project leaders and project managers are both essential to ensuring projects are completed successfully. While these two titles are often used interchangeably, there are several important differences.
Project leaders are visionaries who guide the team in what they should do and how they should do it. They inspire others when they’re ready to throw in the towel. Project leaders are exceptional at motivating people, keeping them focused on the project, and moving it towards its ultimate goal.
Whereas a project leader is responsible for keeping team members engaged, a project manager is responsible for keeping them organized.
A project manager oversees the tactical duties related to a project. They’re excellent tacticians who execute the strategy that'll make the project leader's vision a reality. They ensure that the team meets its objectives promptly and that the project stays on budget.
Project managers are results-oriented. Their primary mission is to finish the project within the allotted time.
What startup owners need to know about equity grants
For most startups, equity grants are a crucial part of overall compensation. Granting equity helps employees to feel vested and therefore part of the company. This is important because employees who feel part of the team tend to be more committed to the corporate mission.
Because of all this, it pays to have an excellent understanding of how equity grants work.
Here are the standard terms used with equity grants:
- VESTING: An employee accrues non-forfeitable rights according to a schedule set up by the company. Vesting protects startups from team members who leave early and rewards those who stick it out for the long haul. The current industry standard is a four-year schedule with monthly vesting over that period and a one-year cliff. The cliff is the period that must pass before an employee gets any equity.
- TRANSFER RESTRICTIONS: they determine when stock may be sold or transferred and to whom. The purpose behind these restrictions is to control the startup’s stock ownership.
- RIGHT OF FIRST REFUSAL: This gives the company the right to purchase a stock that’s being transferred.
- REPURCHASE RIGHTS: These rights give your organization the right to buy back stock and allow it to reward future employees without suffering the effects of stock dilution.
- TERMINATION PROVISIONS: Options usually have a 10-year expiration date, but that can be adjusted depending on the circumstances of a team member's departure. For example, workers who leave typically have 30 days to exercise their options, while those who are fired without cause have 90 days. There's an immediate expiration for employees fired with cause.
- ACCELERATED VESTING: Options vest immediately if certain events occur. For example, if another company acquires the startup, resulting in the termination of an employee.
Common types of equity grants
Here are the most frequently used types of equity grants:
Stock options let a team member purchase shares of stock at a fixed future price. This is known as the “strike price.” To an employee, the value of a stock option is the difference between the strike price and the value of the shares when they're purchased (assuming the second number is higher).
Stock options are usually subject to a vesting schedule, usually four years with a one-year cliff. This means that no vesting happens within the first year. Then, vesting occurs incrementally over the next four years.
Employees can exercise options for a fixed period, which is commonly seven to 10 years. This is contingent on an employee remaining with the company and is known as the “exercise window.” If the employee leaves the company, the options usually expire 90 days after termination.
Types of stock options
There are two major kinds of stock options: incentive and non-statutory.
Incentive stock options (ISOs)
Incentive stock options (ISOs) can only be granted to employees. Some companies go further and only give them to management. ISOs come with beneficial tax treatment. If specific requirements are met, ISOs are taxed as capital gains instead of ordinary income. This gives you more tax strategy flexibility because they're not taxable at vesting.
ISOs also have a lower tax burden than NSOs (Non-Qualified Stock Options). That's because they're not subject to ordinary income tax on the difference in value between the exercise price and the stock's fair market value.
Non-statutory stock options (NSOs)
Unlike ISOs, NSOs may be granted to anyone who provides company services, including employees, directors, officers, and independent contractors. However, NSOs are taxed at ordinary income rates rather than at the capital gains rate.
Restricted stock is ownership shares issued to employees. Restricted stock cannot be transferred. Furthermore, it must be traded in compliance with specific SEC regulations.
These limitations are meant to discourage premature selling that could hurt a startup. Restricted stock usually becomes available for sale under a multi-year vesting schedule.
Restricted stock units (RSUs)
A restricted stock unit (RSU) is compensation issued by an employer to an employee in the form of company shares. Companies give restricted stock units to a team member who achieves certain performance milestones or remains with their employer for an agreed-upon period.
RSUs give company stock to an employee. However, this stock has no value until it's fully vested. Once the shares vest, they're considered income, and part of the shares is used to pay taxes. The employee then receives the remaining shares and can sell them.
Stock appreciation rights and phantom stock
Although stock appreciation rights (SARs) and phantom stock might be used by startups, they’re not nearly as common as restricted stock and stock options. They’re bonus programs linked to the organization’s increasing value. Recipients aren’t granted actual shares of stock. However, they're given the right to receive the cash equivalent of shares at a future date (phantom stock) or the increase in the shares' value (SARs) over time.
These bonus programs are great for companies that want to reward employees without giving up any equity. Some employees prefer these kinds of awards because they don’t have to invest their cash.
This means beneficiaries of phantom stock or SARs get the financial advantages of having stock without the risk of buying shares. However, they forfeit some of the benefits of owning shares, such as voting power. For those team members primarily concerned with the financial benefits, this is nothing to worry about.
Which type of equity grant should you use?
In a startup, it’s probably best to use a combination of restricted stock and stock options to compensate your team.
How much do project leaders make?
The average gross pay for a project leader in the United States is $114,980.
How much should a project leader equity grant be?
Deciding how much equity you should offer to your employees can be challenging. Because each startup is different, and each employee's circumstances aren't the same, there are no one-size-fits-all rules.
Generally, an equity grant for a project leader who comes in at an early stage should be one to two percent.
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