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Establishing Fair Equity Agreements

One very important and complicated aspect of operating a business, whether with partners or just employees and stakeholders, is the equity agreements that are often made in exchange for investments and offered to early-stage employees. These agreements set forth the terms and conditions of things like stock options, vesting periods, types of equity issued to certain employees and partners, and more. At its essence, an equity agreement is a document that sets out the division of ownership in your company, whether it is a 50/50 division with an equal partner or .01% being offered to an employee.

The team at The JC Law Group, LLC, in Upper Marlboro, works with many different clients to develop and issue equity agreements, no matter how big or small the equity in the agreement may be. It is important that you work with an experienced business law attorney because of the complexity of these agreements and the necessity for clarity in each agreement that you issue. It is important to the stakeholders that their equity in your company is clearly set out, and it is equally – and likely more – important that the legal terms of the equity agreement are extremely clear and complete. Questions about equity and stock options down the road could become a major issue, especially as the value of the company grows and more people are included in these equity agreements.

What Is An Equity Agreement?

Simply put, an equity agreement is a document that sets out the terms and conditions for who owns portions of a company. This could be an even split between two founding partners, or it could be an agreement about how investors have equity in the company in exchange for their risk and financial support. Regardless of the reasons that you are dividing equity, it is important that the document is done right.

Types Of Equity

Below are just a few different types of equity agreements. Keep in mind that even within the following examples, there are many different factors and details that change drastically from company to company, meaning that no two equity agreements are alike, no matter how similar they may appear to be.

Common Stock

Common stock is simply how the ownership of a company is represented in terms of the “shares” of which each stockholder has possession. In a sole proprietorship, it is likely that the sole proprietor has 100% of the common stock. Regardless of the structure of your company, any time you allot a portion of company ownership to someone else, no matter what the terms or reason for the agreement is, you will need to have a clear agreement set forth. These agreements are often based on the number of shares issued, the responsibilities that come with the stock, the privileges that a shareholder is afforded and more.

Preferred Shares

Preferred shares are typically issued to investors as a way to mitigate their risk upon investment. These shares include dividends and a portion of ownership, as with other types of shares, but additionally, they put the investor or preferred shareholder as the top priority for repayment if the company were to liquidate.

In many cases, preferred shares have unique equity agreements that limit the holder’s ability to take part in the governance of the company, but they also have attractive features such as convertibility to common stock, dividends and more.

Restricted Stock

Restricted stock is often issued to employees of a company. In some cases, newly formed companies will offer generous amounts of restricted stock to early employees in lieu of full salary due to the limited cashflow that a new business has. Restricted stock generally comes with clear terms and conditions that the employee must meet before being able to have the stocks transferred to them, including a certain length of time at the company.

Contact Us For Your Equity Agreement Needs

No matter what type of help you need regarding your equity agreements, we are ready to help you as soon as possible. Contact our law offices today online or by telephone at 240-561-9224 to speak with an experienced business law attorney in Prince George’s County.