Start-Up Equity Offerings to Employees: Securities Law Issues

Summary

This practice note discusses securities law issues a start-up company should consider when awarding equity as employee compensation. Start-up companies are generally companies that have recently begun operations or are in the first stages of development. Start-up companies often grant ownership interests in their company to employees, consultants, and others in lieu of or in addition to other forms of compensation. Ownership interests can take the form of options to purchase shares of company stock, shares that are limited as to transfer (restricted stock), or other forms of equity and can range from small amounts to significant stakes. Start-ups award ownership interests often because they have limited cash reserves and revenue, high research and development costs, and other constraints on cash flow, but still need to motivate employees to help build the value of the company, attract qualified individuals, and encourage existing employees to remain with the company.