Stock Plans: Do They Come Stock?
A stock plan is the standard vehicle for issuing equity to startup employees and consultants. It’s a structured stock delivery and maturation program. At its core, it offers a means for controlled issuances of stock across a variety of situations. With such far-reaching influence, such plans need to be drafted and subsequently adopted by both the board and the stockholders.
Startups generally create a stock plan when they become incorporated — whether they plan to do any hiring immediately or not. This approach offers significant simplification of the process, and thereby a significant savings to the corporation over time.
Three Key Benefits of Stock Plans:
- Significant potential for tax breaks.
- Dramatically reduces the due diligence required beyond the initial offering,
- translates into significant savings of time and resources.
- The reduction in required due diligence also applies in acquisition.
The stock plan outlines the total number of shares a startup can issue. This election will then stand indefinitely unless it is overwritten with the approval of both the board and the stockholders. The fledgling corporation is then bound to retaining enough shares available for issuance — commonly referred to as an “option pool” or a “stock option pool.”
Finally, as a matter of practical formality, a stock plan’s name begins with the year in which it was created — i.e. 2018 Stock Plan. This lays the foundation for a self-organizing system should a large number of future stock plans be adopted.
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