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4 Key Components of Vesting Stock for Your Startup

Imagine Mark Zuckerberg billions of dollars richer than he already is. That’s the picture the Facebook mogul painted when reflecting on a subject foreign to the mogul during the company’s early days: vesting schedules.

“I didn’t even know what a vesting schedule was, ... [and] that mistake probably cost me billions of dollars,” Zuckerberg admits.

Ignore that a man already with an estimated net worth of $56.6 billion could have been richer. Zuckerberg’s was an issue that many startups know all too well: How can a company incentivize employees without running out of money or dramatically altering its business model?

A positive work environment is one choice. After all, a welcoming workplace where employees feel valued and safe can improve an employee’s work-life balance and a business’s odds for success. Contributing to a 401K, offering flexible work schedules, or even providing food for employees are all useful silver linings but can be costly and less than ideal.

Vesting stock, unlike other incentives, provides more meaningful and cost-effective benefits. These plans, which are really contracts between employee and employer, allow the former to sell or bequeath shares to the latter for a price. It’s one of many options, but it’s often overlooked. Startup owners trying to improve their foundations on a budget would be wise to utilize it.

Why Vesting’s Stock Is on the Rise

Stock options’ biggest plus is immediacy. Employees get afforded the chance to see the fruits of their labor immediately, instead of down the line. And what better way to help your employees and yourself than by giving stakes in the company to your workers and yourself a recruiting boost?

In the startup world, many candidates expect stock options as part of incentive packages and bypass companies that don’t offer them. For the hirers, vesting options allow startups to offer lower salaries but sweeten their offers elsewhere.

Unlike the alternatives, vesting stock aids a company’s bottom line without asking too much of it in its infancy. If you decide to give stock options a try, how can you ensure you’re doing it right? Here four tactics to follow:

1. Put it on the calendar. Don’t grant stock options outright; instead, use a vesting schedule that aligns with industry norms — typically around four years.

If the employee leaves prior to the fourth year, the company can recoup the stock and have little exposure. Zuckerberg recovered from this misstep, but you should make sure you don’t have to by instituting this strategy immediately.

2. Make it the norm. One of Zuckerberg’s early business partners who took advantage of this was glad he did. David Choe painted murals for Facebook’s California office during its startup days, taking stock shares in lieu of payment. In 2012, those stakes rang in at around $200 million.

Make employee stock options a standard part of your compensation package. Get an accurate depiction of a stock’s worth with a 409A valuation. This formal report indicates a share’s value and keeps companies within the scope of IRS compliance. If you offer stock options, employees have skin in the game as co-owners wanting to help the company succeed.

3. Cover your butt. Protect yourself by double-checking paperwork and consulting attorneys. As the company grows, it’s important to have all the necessary logistics in order. Don’t overlook the capitalization table, which lists all the people and entities that own stock in your company.

It’s easy to manage in the earliest days of the company, but things can get complicated in a hurry, especially once you bring investors on board. If you are preparing for fundraising, speak with an expert about readying your cap table for the funding event and managing it from there on out.

4. Stay in the loop. Keep abreast of compensation trends or shifts within your industry. A lacking or nonexistent compensation package may cause an employee to leave for another — better — offer.

Recently, companies like Pinterest and Quora adjusted their respective vesting schedules to benefit their employees. Workers with fewer than two years of service may choose to unlock their stock options for up to seven years, a huge incentive and adjustment some are sure to notice.

Catered lunches and flexible scheduling are cool, but offering vesting stock options that benefit both employer and employee can be a way to more meaningfully incentivize your workforce. Done the right way, stock options attract top-notch employees and keep them loyal, too.