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Is your equity compensation plan fair?

March 26, 2013 Article 1 min read
Authors:
David Howell

Empty boardroom set up for a meeting 

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:

  1. Have the right tools for the job
    Select the right form of equity compensation for your intended goals.
  2. Gotta earn It
    Include vesting or other requirements designed to create an incentive and reward.
  3. Go the distance
     Have a plan designed to increase shareholder value over the long term.
  4. Measure your ingredients carefully
    Analyze the dilution/accretion to shareholder value using accurate methods.
  5. Skin in the game
    Participants should have similar risk and return features to shareholders.
  6. It’s money that matters
    Valuation dilution is almost always more important than percentage dilution.
  7. How will it play with the troops? 
    Have a plan that fits the culture of the company.
  8. Benchmarking
    Have a plan that compares favorably to its peer group.
  9. No one expects an inquisition
    Have the data and analysis to support the plan should it come under scrutiny.
  10. Pass the smell test
    Have an overall plan that’s not unreasonable or excessive.

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