As we've seen more scalable startups in the Wilmington area, we've received an increase in inquiries as to how to incentivize employees with equity ownership.
There are a couple of different ways this can be accomplished, and each approach has different tax treatments.
We'll cover some of the tools available, but the devil is in the details so we really recommend working closely with an experienced attorney that is collaborating with your CPA firm as part of this process.
With a lot of these, equity incentive approaches require a 409A valuation to take place, which can mean an additional cost of putting them in place.
If you are starting a company from scratch and you think there is a possibility you are going to offer equity to future employees or bring in external investors, we recommend you set up a corporation and not an LLC. The reason for this is a corporation can bring in additional owners by issuing additional shares. This will avoid triggering adverse tax consequences for the existing owners that would occur under an LLC structure.
There are a couple of different ways to offer equity-type ownership to employees. I've listed them in the order in which we most commonly see them.
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