When it comes to determining the fairness of your equity compensation plan from a financial point of view, here are some key items you should consider:
- Have the right tools for the job
Select the right form of equity compensation for your intended goals.
- Gotta earn It
Include vesting or other requirements designed to create an incentive and reward.
- Go the distance
Have a plan designed to increase shareholder value over the long term.
- Measure your ingredients carefully
Analyze the dilution/accretion to shareholder value using accurate methods.
- Skin in the game
Participants should have similar risk and return features to shareholders.
- It’s money that matters
Valuation dilution is almost always more important than percentage dilution.
- How will it play with the troops?
Have a plan that fits the culture of the company.
Have a plan that compares favorably to its peer group.
- No one expects an inquisition
Have the data and analysis to support the plan should it come under scrutiny.
- Pass the smell test
Have an overall plan that’s not unreasonable or excessive.