The forms of equity compensation are restricted shares and stock options, but each appears with some conditions.
- Restricted shares are awarded absolute, and their owner has the same rights and privileges as any shareholder. For example, they may receive dividends and vote at the annual meeting. However, the company may reserve the right to buy back unvested shares if the employee leaves the company, and the shares may be vested.
- Stock options are the right to buy several shares at a specific price in the future. The employed will get a windfall when and if the company’s stock price exceeds that price. The stock price is often vested like restricted shares.
Restricted Shares
Restricted shares are an outright award of equity ownership in a company. To motivate employees, most common established companies give them an equity stake.
However, they are usually vested. It is on situation that the employee will continue working at the company for a few years or until a company milestone is met when secured shares are given to an employee. This might be another financial target or an earnings goal.
Such shares are often acknowledged in stages, each with its vesting date or milestone attached.
A double-trigger provision may restrict the shares. Meaning, an employee’s shares become unrestricted if another acquires the company, and the employee is fired in the restricting that follows.
After a merger or other significant corporate event, insiders are often awarded restricted shares. The restrictions are expected to deter premature selling that might adversely affect the company.
An executive who leaves the company, runs afoul of SEC trading restrictions may have to forfeit their restricted stock, or fails to meet performance goals.
Stock Options
Employee stock options are an agreement of future profits that might or might not pan out yet. They are often granted by start-up firms that have not yet gone public and want to persuade employees to get the firm outside the ground.
Stock options do not affect a transfer of ownership. They are a right to buy shares at a specific price at some future date — the employee earns by the difference between the option price and the actual market price.
Stock options are usually restricted by a market standoff provision, which limits the sale of shares for a certain period after an initial public offering to stabilize the market price of the stock.
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