Equity compensation is a non-cash pay that is offered to employees and represents ownership in the company. This can come in many forms, such as restricted stock and performance shares and is a benefit offered by many public companies, as well as some private companies. One of the forms of equity compensation that is offered to employees is called profits interest.
Profits interest is given to an individual for their service to the partnership and is based on the future value of the partnership. This award consists of receiving a percentage of profits from a partnership without having to contribute capital. Oftentimes, this is used to motivate employees when there is limited funds for monetary compensation, which is common among startups.
Aside from being a great incentive for employees, profits interest offers the following benefits:
- Flexibility – Profit interests are made up of two parts, which are an annual profit