Five Key Errors in Designing Equity Compensation Plans in Closely Held Companies  - CLEO Skip to main content


I have had dozens of conversations with business owners who want to share equity with some or all employees over the past several years. I start by asking what they are thinking of doing. With almost unfailing consistency, they say:

1. I’m planning to give out 10% of the equity or rights to the equity.
2. I’m planning to give most or all of whatever percentage I’ve decided to give up front to those eligible.
3. Employees will only be able to exercise their awards when the company sells or goes public.
4. Only key employees will get equity.
5. I will base the amount each person gets on a percentage of the company that I have heard or read makes sense.

In some cases, one or more of these ideas makes sense. But more often than not, they don’t.