Why is giving equity to early employees a mistake?

It is a common practice in startup companies to offer equity in the company as a way to entice people to work for you. This may seem like an easy and cost-effective way to get good employees for a North Carolina business that has yet to prove itself. It can allow you to secure the labor you need with little upfront cost, but the long-term cost should be what worries you.

MarketWatch explains that when you give equity, you give a share of your ownership in the business, which is not something to take lightly. You should always protect yourself with an agreement on what happens to the ownership of the equity if the employee leaves the company.

In granting him or her ownership in your company, you give that employee some control. The employee has certain rights as an owner and access to documents that he or she would not usually have as an employee. It gives the employee a lot of leverage that could be bad if he or she leaves the company, especially if you fire him or her.

Your employee will have voting rights and could have an impact on the running of your company. It is possible for him or her to cause issues even when he or she is leaving the company, so you need to protect yourself, other owners, employees and the business.

A better alternative to providing equity is to offer some other type of benefit that is highly sought after, such as excellent medical insurance or a stellar vacation/time-off policy. These options do not affect your business as much as giving away equity can. This information is for education and is not legal advice.