Critical Success Tip
To use stock as an employee retention vehicle, require a holding period before the shares can be sold. Remember to retain the right of first refusal on any sale - you don't want those shares finding their way into unfriendly hands. Plus, require the shareholder to offer the shares for buyback in the case of termination. (Offer - don't require your company to buy them.) Lastly, if you don't want to share decision-making power, create two classes of shares: voting and non-voting.
Non-Qualified Stock Options
Non-Qualified Stock Options are a powerful and efficient way to keep your employees. An option holder has the right to purchase shares in the company at the "grant price", which is typically the current share value. As your company gains in value, the value of the option rises. Options often have a vesting period before they can be "exercised" to purchase shares, requiring employees to stick around and keep contributing to the company. A benefit for employees comes from the tax-deferral feature: there is no tax due until the option is exercised. Importantly, options themselves do not carry voting rights.
Critical Success Tip
Since you can grant non-qualified options on a totally discretionary basis, use them to reward performance on individual, team and company levels. Also, establish the vesting period to occur on an "stair-step" basis - for instance, 50% vest in two years, the second 50% vest in another two years. This type of structure gives your employees the "choice" to leave, but holds out a significant carrot for staying.
Phantom Stock
Phantom Stock is an accounting fiction which enables top people to partake of increases in company value. Unlike "real" stock, phantom stock does not convey any actual ownership in the business. A phantom share is a credit in an employee account for an amount equal to the value of your company's "real" shares. Over time, the account is credited with changes in share value, along with dividends and other distributions. There is no taxable income for the holders of phantom shares until they are "redeemed" by the employee.
There are two types of phantom stock plans, "growth" and "basic". Under the growth plan, at redemption, employees receive an amount equal only to the appreciation in the share account. Under a "basic" plan, employees receive the total of the appreciation, plus the original value of the shares.
Critical Success Tip
Phantom shares are the equity vehicle of choice when you don't want to dilute either ownership or control, or when you have a Subchapter S and can't exceed the maximum of thirty-five shareholders. Establish a vesting period for phantom shares: grant the shares, but require a minimum holding period. If the employee leaves before the holding period expires, he or she forfeits the value of the shares. You can also establish a payout period, after which time you will redeem the phantom shares for cash. In other words, your people don't have to leave to cash in.
Valuation
For public companies share value is determined in the marketplace. Private companies must engage in some kind of valuation process, which is outside the scope of this article - but a few "success rules" apply.
1) Perform the valuation at regular, published, intervals - at least once per year.
2) Document your valuation process so that your shareholders can understand it.
3) Establish a capital reserve to enable share redemption, and publicize it.
Following these three rules will increase your employees' sense that their shares (and options) have real value, and will have them want to remain and continue participating in the upside.
Information on salary wages,
salary vs hourly , hourly wages can be found at the
Knowledge Galaxy site.
