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How you can compensate employees using stock options as an alternative to a salary

Let’s admit it, starting a startup sinks a hole in your pockets. Regardless of the savings you managed to come up with or the grants you received, there always seems to be very little money at your disposal. You might then decide not to hire. But you really need help because you have a schedule to keep and a product to launch. How do you crack this? Two ways: Company stock options and Phantom company stock options

How about Stock Options first?
The Employer company gives the employee the right to purchase shares of the company at a predetermined price. The buying price of this stock options is usually at a discount of the market value of the shares.

The stocks can be:

  • Incentive: meaning, one only pays the capital gains tax upon the selling of their stock
  • Restricted Stock: The shares are released/allocated to the employee only after certain restrictions have been met. The employee only pays taxes for them upon selling the shares
  • Employee Stock Purchase Plan: Employers come up with a plan to enable the employees to buy shares of the company easily

Phantom Shares
Phantom Stocks, in lieu of company shares, involves getting into a contractual agreement with an Employee which bestows upon the Employee the right to a cash payment at a designated time or in association with a designated event in the future. Payment is to be in an amount tied to the market value of an equivalent number of shares of the corporation’s stock.

How to keep them locked
Usually a vesting period at this juncture would come in handy. This is the specified period in which the employees must work for them to realize the shares. For instance, if the vesting schedule is for 6 years and one leaves employment in the 3rd year, then the employee can only take advantage of half of the shares allocated to him/her.

Exercising their rights
Since there are two different options, they are exercised differently, the notable difference is that Phantom Stocks can be exercised by reason of an event and not passage of time.

It’s upon the employee to choose when to sell their shares after the vesting period has lapsed. Some do it immediately after, while others wait for a favorable time when the value of the share has increased. Either way, it’s their decision to make.

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