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. - Benchmarking
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.
