How can you give stock to an employee?

How can you give stock to an employee?

When planning to give stock to an employee, remember that an employee that owns stock has the right to vote those shares.  He/she can request and receive financial information about the company and can question your business decisions.

There are three main ways you the owner can get stock to an employee.  He/she can buy the stock today.  He/she can get the stock today but have the risk that he/she may forfeit some of the stock if he/she doesn’t remain an employee long-term.  Or he/she can have the option to acquire the stock later if he/she remains an employee.  Each of these three ways has different economic and tax outcomes.

One issue with getting stock to an employee is the price, and it is best to consult a valuation expert before finalizing anything.  As an owner, you must ask yourself do you want to charge him/her the full price for the stock, or do you want to give him/her a break on the price?  If you are interested in giving them a price break, then you could give him/her the stock as a bonus.  Or you could have him/her buy the stock at a low price.  Lastly, you could have the company promise to pay you a big bonus later.  By doing so, the company’s value is less because of the bonus, and the stock is less expensive for the employee.

There isn’t a “best” way.  Some owners believe that an employee must pay full value.  They want to be sure that the employee is committed to the company psychologically and they also want some profit from this.  Other owners give the stock away, like a cash bonus because they feel that the employee has already earned it.

Many owners end up in the middle.  They want a psychological commitment but, yet they also want some profit but don’t want to scare the employee off by demanding too much money.  This type of plan is often more complicated to put together than the first two options mentioned above, but sometimes it meets the owner’s needs and those of the employee better.

If you would like more information or have any questions, please reach out to MB Law at info@mb-law.law

Check out our other articles related to this topic:

How Do You Sell Your Business to Your Employees?

Should You Sell Your Business to a Key Employee or a Group of Key Employees?

*This information is for general purposes only and is not intended to constitute any specific legal advice of any type.