Equity Incentive Plan Toolkit

Resources to assist a company or partnership in drafting and implementing an equity incentive plan.

Practical Law Employee Benefits & Executive Compensation

Equity compensation is often a significant portion of the total compensation paid to employees and other service providers. An equity incentive plan can be used to:

  • Align the interests of the company's service providers with those of shareholders.

  • Attract and retain valuable service providers.

  • Improve service provider productivity.

Public companies must take into account certain Internal Revenue Code (Code) provisions, such as Code Section 162(m) (26 U.S.C. § 162(m)), when designing their equity plans. Public companies must also consider the views of shareholder advisory groups and others who review compensation plans with a critical eye. For example, certain plan features that were once common are now considered poor pay practices that could result in a shareholder vote against a plan. Designing a public company equity incentive plan has therefore become more challenging.

Private companies that are trying to compete with public companies for talent must balance the need to provide some form of long-term equity compensation with the desire to maintain control. Private company plans generally provide for certain rights that make it easier for majority shareholders to sell the company. These rights may be included in the applicable award agreement or the shareholders' agreement and all documents must be appropriately coordinated.

In the partnership context, because of their flexibility and attractive tax characteristics, profits interests are the preferred equity compensation tool. But to ensure proper tax treatment, the partnership must be careful to structure the profits interests appropriately and treat the recipients of profits interests as partners in the partnership as of the grant date.

The Equity Incentive Plan Toolkit contains continuously maintained resources designed to help companies and partnerships draft equity incentive plans and related documents that:

  • Meet the company’s business objectives.

  • Comply with tax rules and securities laws.

  • Withstand shareholder scrutiny, where applicable.

For resources on director equity compensation, see Director Compensation Toolkit ( www.practicallaw.com/9-583-7410) .

 

Practice Notes

 

Standard Documents

 

Standard Clauses

 

Checklists

 
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