Equity ownership can change lives, but understanding it is not easy. Companies often offer stock as part of your compensation package so you can share in the company’s success. But they don’t usually explain what you need to know so you can make informed decisions. Here’s how to make sense of your offer letter and option grant.
Individual equity compensation plans tend to fall into five (5) main categories:
- Stock options
- Incentive stock options (ISOs)
- Non-qualified stock options (NSOs or NQSOs)
- Restricted stock and restricted stock units (RSUs)
- Stock appreciation rights (SARs)
- Phantom stock
- Employee stock purchase plans (ESPPs)
These plans provide employees with some form of special consideration regarding price or terms. Our discussion here does not cover simply giving employees the right to purchase stock.
Stock options (Both ISOs and NQSOs) give employees the right to buy a number of shares at a price fixed. The purchase price is defined when they are granted to the at grant for a defined number of years into the future. They can be either Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NSOs).
Restricted stock and its close relative restricted stock units (RSUs) give employees the right to acquire or receive shares, by gift or purchase, once certain restrictions, such as working a certain number of years or meeting a performance target, are met.
Stock appreciation rights (SARs) provide the right to the increase in the value of a designated number of shares, paid in cash or shares.
Phantom stock pays a future cash bonus equal to the value of a certain number of shares.
Employee stock purchase plans (ESPPs) provide employees the right to purchase company shares, usually at a discount.