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.
An equity compensation agreement typically includes the following key components:
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.
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:
The Offer Letter, on the other hand, contains information that are specific to the option-holder:
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.
Using a template offers several benefits, including:
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!
Cake allows you to create legal contracts, send them for signing, and automate your contract management, all in one place.