Employee equity agreement template

Equity compensation is a type of compensation that offers employees equity ownership in a company. Startups use employment offer letter with equity as a tool to attract top talent and give them an incentive to grow with the company.

An employee equity agreement is the legal document that outlines the terms of an equity compensation plan. The agreement usually includes information such as the type of equity awared, number of options or shares, vesting schedule, and information that's important to exercising options.

An employee equity agreement is a critical component of any employee equity program. It is essential to have one in place to protect the interest of both the employer and employee and help ensure a long-lasting working relationship.

Key components of an employee equity agreement

An equity compensation agreement typically includes the following key components:

• Grant of equity. The agreement will state the type of equity (such as stock options, RSUs, or SARs) and the number of shares/options being granted.
• Exercise price. If the equity grant is in the form of stock options, the stock options offer letter will specify the exercise price, which is the price at which the employee can purchase the underlying stock.
• Vesting schedule. The vesting schedule will outline when the employee's equity will become available. Vesting can occur on a time-based schedule or upon the achievement of specific milestones.
• Exercise expiration. The agreement will outline what happens to the employee's equity if their employment with the company terminates. For example, the agreement may state that the options can be exercised 10 years from the start date, after which it automatically expires.
• Tax implications. The agreement will specify the tax implications such as how the equity grant will be taxed and when taxes must be paid. It will also state taxation details specific to the jurisdictions of the recipient's location.
• Governing law. The agreement will specify the governing law that applies to the agreement and any disputes that may arise.

Employee equity agreement template

In the Cake app, we refer to this document as the "Offer Letter". The Offer Letter is a formal document issued to an employee or contractor, giving them the legal right to the options. It sets out all of the specific terms that apply to that individual employee or contractor.

The Offer Letter serves as an extension of the Plan Rules, which apply equally to all participants under the plan.

Plan Rules + Offer Letter

In the Cake platform, we refer to these documents as the Plan Rules and the Offer Letter. These two documents should be read and understood together.

The Plan Rules set out the rules and processes for option-holders and stockholders. You can think of the Plan Rules like an additional Stockholders Agreement that only applies to employee stock option recipients. Plan Rules provide full transparency, helps avoid disputes, and gives the company peace of mind that it’s protected in various scenarios.

Generally, the Plan Rules includes terms that apply to all the recipients of the equity program:

• Eligibility to participate
• Treatment of options for leavers
• Rules on transfers
• Determination of Fair Market Value (in case of a buy back of shares)
• Process for exit events
• Powers of the company to amend the rules
• Other formal contract requirements, such as governing law, and approvals required

The Offer Letter, on the other hand, contains information that are specific to the option-holder:

• Automated employee details
• Number of options (grant details)
• Exercise price
• Vesting schedules
• Exercise expiration date
• Local tax statements

In some jurisdictions the Offer Letter is referred to as an Equity Compensation Agreement or a Stock Option Agreement.

Cake's Plan Rules and Offer Letter templates are reviewed by lawyers and used by many companies around the world. It prompts you to fill in these details and automatically populates the applicable restrictions into your Plan Rules and Offer Letters.

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Why use an employee equity agreement template

Using a template offers several benefits, including:

1. Consistency. An equity compensation agreement template ensures that all employees receive the same terms and conditions.
2. Legal compliance. Using a template helps ensure that the agreement complies with all relevant laws and regulations.
3. Efficiency. Creating an agreement from scratch can be time-consuming and expensive. Using a template can save time and reduce legal costs.

Legal templates in the Cake platform are reviewed by lawyers and experts. You can also upload your own or customise existing templates. As always, if you're not sure, our customer success team and legal partners are here to help!

Why use an employee equity agreement template

Using a template offers several benefits, including:

1. Consistency. An equity compensation agreement template ensures that all employees receive the same terms and conditions.
2. Legal compliance. Using a template helps ensure that the agreement complies with all relevant laws and regulations.
3. Efficiency. Creating an agreement from scratch can be time-consuming and expensive. Using a template can save time and reduce legal costs.

Legal templates in the Cake platform are reviewed by lawyers and experts. You can also upload your own or customise existing templates. As always, if you're not sure, our customer success team and legal partners are here to help!