We all have, or at least have heard of, “New Year’s resolutions.”  On an individual basis, that might look like “I would like to go to the gym more often this year” or “I will finally learn how to cook my grandmother’s famous pasta.”  On a corporate basis, however, that might look like more like “I would like to reward my employees for their hard work, but I’m looking for ways to incentivize them other than dipping into the company’s coffers” or “I want my employees to feel like part of the team and am considering granting them equity in the company.”  If those corporate resolutions are on your mind, then at a bare minimum, you should be asking yourself the following questions:

• “Actual” Equity versus Phantom Equity.
  • Do you want to grant the employees an actual ownership interest in the company?
    • If yes, then what type of interest do you want to grant to them?  A “regular” capital interest (stock in a corporation or membership interests in a limited liability company), profits interests (a share in the appreciation of the limited liability company or partnership in excess of a specified participation threshold), an option (a contractual right to purchase equity at an agreed upon exercise price, within an agreed upon timeframe) or something else?  Will the equity be voting or non-voting?  What do you expect to happen if their employment is terminated (e.g., any buyback provisions)?
    • If you do not want to grant employees actual equity ownership but still want to provide incentives that mimic equity ownership, you may want to consider a written bonus plan that provides employees with “phantom equity”, which is a right to receive bonus payments roughly equivalent to what the employee would receive if she or he held actual equity rather than the phantom equity.  In that instance, you will want to consider how you want to craft this contractual agreement with the employee.  For example, will recipient be entitled only to a portion of sale event proceeds or also as an ongoing percentage of profits?  How will a “sale event” be defined?
• Vesting.
  • Will the grant be fully vested on day one or will it be subject to vesting?  Will the vesting be time based and/or performance based?
  • Will the recipient file an IRS Code Section 83(b) election?
• Termination.
  • What happens if the recipient is terminated or otherwise leaves the company?  Will the company have a right (but not an obligation) to repurchase the vested shares?
  • Will there be any sunset provisions after a termination (e.g., if the recipient is terminated for “good reason” and the company is sold within X months thereafter, then the recipient is entitled to Y% of the net sale proceeds he/she otherwise would have received)?

The above questions are a starting point for companies addressing these “corporate New Year’s resolutions” and should be discussed in detail with counsel.