A new trend in the gig economy is to offer unusual forms of compensation for work. Private companies, as well as publically traded companies, can offer equity shares as part of a compensation package for employees and independent contractors. There are legal, tax, and accounting issues when private companies offer limited equity shares. The legal issues can be managed by a carefully written contract that details the following:
A private company can restrict any of the usual rights and responsibilities that come with equity share ownership, especially for a startup that needs to conserve capital, as long as the restrictions are legal and carefully delineated in a contract.
Private companies do have to comply with state and federal securities laws regarding the sale of securities, and this includes the registration requirements for the Securities and Exchange Commission. However, equity shares can be granted outside of the provision of sale. If the structure is not equity shares as part of compensation or retirement but is structured as a bonus or award, then the registration requirement does not come into play.
Even in the absence of SEC registration, though, accounting needs to carefully note the equity share ownership by whatever structure, so that anyone looking at the books of a company prior to a sale or change in company organization knows the volume of the equity shares held and by whom. Value is fluid and determined in other ways.
Jake Posey noted within the rapidly developing gig economy, freelancers and independents are enjoying the freedom to construct the working life they want. Offering limited equity shares for work is one way startups can conserve capital while developing a talent pool who are invested in quality work and loyal to the new business.
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