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Equity compensation is non-cash pay that is offered to employees. Equity compensation may include options, restricted stock, and performance shares; all of these investment vehicles represent ownership in the firm for a company's employees. At times, equity compensation may accompany a below-market salary.
An equity agreement details the way a group of partners in investing divide ownership when a new business is started. The agreement lists how payoffs, profits, responsibilities, and stocks are divided among the partners. These documents are legally binding agreements prepared by an attorney.
How is equity paid out? The company purchases the options for the employee, thus assuming the risk and saving the employee the cost of exercising the options. The company lends the employee the money to purchase the options and is paid back when the options are liquidated.
Draft the equity agreement, detailing the company's capital structure, the number of shares to be offered, the rights of the shareholders, and other details. Consult legal and financial advisors to ensure that the equity agreement is in line with all applicable laws and regulations.
Warrants, forward repurchase contracts, and convertible debt are all examples of equity-linked contracts.