What You Need To Know About Equity As A Growing Business

Last night, Easop held our third webinar featuring incredible guest speakers Kristin O’Hanlon of Cooley law, Alain Bensimon of Aircall, and Naël El Berkani of Easop.  And we went deep on topics around how to grant equity to your team, what pitfalls you need to avoid, and so much more.  These are some of our biggest takeaways:

>>> Disclaimer: What you see below and in the webinar is not legal advice and shouldn’t be taken that way.  If you need legal advice, our best suggestion is to hire a lawyer.

Early Stage Mistakes

We kicked off the meeting trying to understand some of the biggest mistakes made by companies that are still in the early stages, are recruiting talent, and want to make sure equity is a part of that talent pool’s contract.  But so many companies jump into granting equity without taking into account one of its most important aspects, taxes. Here’s what Kristin had to say on it:

Kristin O'Hanlon, Senior Legal Counsel @ Cooley

“Under section 83, the default is that when you get stock that’s subject to vesting, you’re going to get taxed not when you get the stock (unless it’s vested), but only as those shares vest.  Now, we expect the fair market value to increase over time.  So if you’re subject to tax as the fair market value increases, and you knock it out of the park, you’re going to have a huge tax hit on illiquid stock because the company’s not public, it’s private, and so you can’t sell those shares to cover your tax hit.”

But these issues can sometimes be avoided.  But you often need someone helping you (such as a general counsel for your company) to determine if that cleanup process can even be done (or if it’s too late).  Here are Alain’s thoughts on the matter:

Alain Bensimon, General Counsel @ Aircall

“What you often see coming into a company and being sometimes the first in house counsel stepping in, you’ll notice that, you know, there’s been a lot of promises or changes to grants without approval or the necessary documentation. And often you realize this in a context where time isn’t on your side. It’s either gonna be in the context of a due diligence or an audit.  As the company matures and you start getting audits of your financial statements, the auditors start digging pretty deep into the history of the evolution of the cap table, and a lot of things get uncovered at that point as well.”

Growing Pains

Now, we’ve also seen that companies, as they grow, are often handing off those tasks to more specialized groups inside their companies (finance experts, accountants, what have you).  And that may sound like a good thing at first, but it comes with its own challenges.  So we asked our experts what we should think about in this realm as well.  Here’s what Alain had to say:

Alain Bensimon, General Counsel @ Aircall

“Two big challenges that we have as companies is, one, to make sure employees understand the values of their equity.  And the other one is to really manage the dilutive effect of equity on the cap table, and to really administer them properly”

These two elements, Alain said, can have an enormous impact on how the company is valued, and how they effectively communicate that value to their team.

Naël really took some time on this point, outlining the importance of communication with respect to international equity distribution, and helping international employees to understand it in the same way Americans have up to now.  Here’s what he had to say:

Naël El Berkani, Chief Legal Officer @ Easop

“One of the things any company hiring abroad would probably underestimate is the lack of understanding of equity by people that are outside of the home country.  In the US, it seems like everyone wants it.  In France, a couple of years ago, nobody knew about it or it was a benefit nobody really cared about.  So, I think communicating equity to those international people is something that’s challenging, and that requires a little bit of effort from US companies.  Mostly, because it’s been there for 20 years in the US, but in France, still, people have doubts about how it works”

More To Learn

Ultimately, we received some incredible responses from our network about all the value in this webinar (which was way more than what’s in this article).  There’s so much to learn in this area of equity, and it’s extremely important for your company’s growth.  

So if you want to know more, you can check out the webinar replay here.

P.S. - We'll be putting out a practical, comprehensive list in the coming days breaking down the common mistakes we covered in the webinar, so stay tuned!

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