Outten & Golden attorneys are familiar with various equity compensation structures, whether public or private. We review and negotiate the terms and conditions of equity compensation grants for employees and executives. If a tax specialist is required to explain the tax consequences of equity compensation, we have professionals available to ensure that our clients receive the best advice. A variety of legal, accounting, and tax issues are involved with equity compensation. Employees receiving equity compensation need to understand the terms and conditions of the grant.
Employees and executives often receive equity compensation as part of their total compensation packages. Equity compensation is non-cash compensation that represents an ownership interest in the company. The two most common forms of equity compensation are stock options and restricted stock. However, types of equity compensation vary among public and private companies and include grants of unvested interests in the company under different terms and conditions.
A stock option is a right issued by a corporation to an individual or an entity to buy a set amount of shares of company stock at a particular price within a specified period of time. The price at which the employee can buy the option is called the “grant” price and is usually the market price at the time the option is granted. Usually an employee can choose to buy the shares at the grant price at any time they are vested during the term of the option. There are two major kinds of stock option programs: nonqualified stock options (NSOs) and incentive stock options (ISOs).
Restricted stock is a legally binding right to shares of stock that are restricted. The most common restriction is on vesting. The shares vest over a period of time and the employee cannot take possession of the shares until the time passes and the restrictions lapse. Some restricted shares vest gradually (i.e. a certain percentage of the grant vests each year), while others vest all at once. During this time, the employee must remain employed by the company. If the employee leaves the company she usually forfeits her unvested restricted stock. Restricted stock gives the employee the benefits of ownership, such as the right to vote and receive dividends during the vesting period. However, the employee cannot sell or dispose of the shares until the vesting or other restrictions lapse.