As competition for talent grows, many privately owned companies are turning to share-based compensation as a way to attract and retain key employees. Stock options, restricted stock, profits interests, and even phantom equity can all be powerful incentives—but they also introduce financial, tax, and governance considerations that owners should understand before moving forward. A well-designed plan can strengthen employee loyalty and reward performance, while a poorly designed one can create unintended costs and complications.
One of the most important factors for business owners to recognize is the valuation requirement. Under accounting rules in FASB ASC 718, companies must measure equity awards at fair value on the grant date, and in many cases require an independent valuation. Business owners should be prepared for both the administrative effort and the financial statement impact of recognizing compensation expense for share-based awards.
It’s also essential to consider how equity awards affect ownership and control. True equity awards dilute existing owners and may introduce new voting or profit-sharing rights. While equity-linked alternatives like phantom stock avoid dilution, they create future cash payment obligations. These decisions should align with long-term goals: preserving control, preparing for a future sale or succession, or strengthening retention in key roles. Choosing the right plan type can make a substantial difference in both governance and financial outcomes.
The structure of the awards also matters. Clear vesting conditions can encourage employees to stay and contribute to long-term growth. Time-based vesting, performance vesting, or milestone-based vesting each carries different motivational effects. Poorly written vesting terms, however, can result in employees benefiting long after they have left the company—or receiving payouts disproportionate to their contributions. Clarity and careful drafting are key to balancing incentives and fairness.
Finally, owners should keep in mind that share-based compensation creates ongoing reporting and compliance responsibilities. ASC 718 requires ongoing expense recognition and disclosures, and tax rules under IRC §83, §421–424, and §409A can be complex. Working closely with legal, tax, and accounting advisors is essential not only when designing the plan but throughout its life.
With the right preparation and guidance, share-based compensation can be a powerful strategic tool for private companies—enhancing employee engagement while supporting long-term business goals. Contact 415 Group to discuss how we can help you evaluate your inventory, develop a practical reserve policy, and ensure your approach supports both compliance and business strategy.