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How to Design and Implement an Equity Incentive Plan

Published September 10, 2010

It is obviously important for companies to attract and retain top-level workers.  It is equally important to motivate and encourage them to strive for success.

Offering equity incentive plans to high-level employees frequently accomplishes both tasks.  An equity incentive plan is a contract between the employee and the employer to provide an equity interest in the company. If the employee’s success is tied to the company’s success, it can create more incentive for stellar performance.

Equity incentive plans can vary greatly, but they typically include some combination of stock and stock options.

Here are several key tips for drafting a quality equity incentive plan:

  • Clearly define the purpose of the agreement. 
  • As with any legal document, make sure that key terms such as “annual award” and “covered employee” are explained in detail. 
  • Include the name of the committee or other parties responsible for administering the plan. Who is on the committee? What are the limits of its authority? 
  • How many shares and under what circumstances is the employee entitled to equity?  
  • How does the employee exercise his options? Be specific. 
  • Include the jurisdiction where laws will govern the agreement.

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