Giving Equity to a Sr. Employee

I'm running a company from the last 10 years. Now I have hired a senior person to head the finance of the company as my knowledge in the finance is nil.He has asked for 6 % equity stake in the company and monthly salary . I'm willing to give the same. Friends please let me know the following: 1. How do I give this stake to him. 2. What should be the terms & conditions or Agreement. 3. Should he be part of the liability or loss. 4. Should he be paying for the equity upfront.5. What are the details I should be careful in the future. Please help me on these questions.

Let me challenge your assumption: Do not give away equity!

Equity is a percentage of ownership. Unnecessarily sharing ownership of a small company is a great way to complicate your life, make a partner out of an employee, and sabotage your business. All of this pain is unnecessary.

Share the success of the moment but not perpetual ownership. The best way to share success like this is through profit sharing. Be as generous as you care to be. Set up a formula where you set aside a percentage of your pre tax profits to be distributed to your senior employee(s). They are rewarded for past efforts, todays efforts, and tomorrows efforts. They share in a percentage of financial growth of the company while remaining in the employee role that made them successful.

First off, have a good look through the questions tagged "equity" here. (Tags in the header.)

I'll concentrate on what I see as the most important topics:

I only have a very brief introduction from you to go on, but could there be a disconnect between his expectations and yours? You've owned the company for 10 years, but he wants a 6% stake -- such a small ownership would only pay out for him if:

1. The company is sold / merges / IPOs
2. There is a profit in the company, and the owners let the company pay dividends (and this one needs good legal protection, fx that the majority owner does not pay out an unreasonably large salary to himself instead of dividends).

Given that you have had the company for 10 years, it sounds like the organic growth kind, not the merger / IPO kind of company, so his 6% equity could very well be worth nothing. Does he understand that?

Have a vesting schedule. That's my main tip, be sure to have vesting, so he earns his way into his ownership share, and doesn't just get it outright at the signing of the contract. Here are two posts about vesting, they're oriented towards high-growth startups, but you should get the idea. For your hire, maybe a 3 month cliff, with the rest of the shares vesting over 9 or 21 months (i.e. 1 or 2 years in total) could be reasonable?

Regarding your questions, I think a trip to a good lawyer who is specialized in business affairs should be helpful. I'm not a lawyer. :-)

Nice answer by Jesper. To add to that, if you've been running your business without incorporating yet, you'll need to do that first. You can then transfer shares in that company to him, and give him 6% of the shares.

As Jesper points out, you don't want to hand over the 6% upfront, but make him earn it. A normal vesting schedule would have a cliff, or a period before which he gets nothing (for example, if he leaves during the first three months he gets nothing), followed by a vesting period, where the shares pay out over time.

Remember, once you give him the shares, they belong to him and you can't get them back (unless he chooses to sell them back to you). Something else you might want to consider is a royalty, say, 6%, which is effective as long as he works there. So he gets his percentage return, and you keep your ownership.