Equity and Incentive Compensation Arrangements for Start-Up Companies

Summary

This practice note provides a brief introduction to the equity and incentive compensation plans and agreements that start-ups often use to attract and retain key personnel. To effectively advise start-ups, and the investors that frequently finance them, it is imperative to understand start-up equity and incentive compensation structures, and why and how they may differ from those offered by more mature companies. The following is a general discussion of compensation practices of investor-backed, Kickstarter-funded, and bootstrapped start-up enterprises, where the founders' intended trajectory is to quickly grow the company (and its value) in the hopes of an exit or liquidity event via an initial public offering (IPO) or sale. It is a world of short- to mid-term time horizons where investors (and founders and senior executives) demand significant growth and substantial returns. This is distinct from the mentality driving many new small businesses or family-owned businesses. It is also ...