Stock Options, basics explained

Updated: May 22, 2019

Leading in from [ Do ESOPs really work? ]



What is Stock Based compensation?



Is there more than 1 way to provide Stock based compensation?


Yes. There are.



1/ EQUITY BASED


Employee Stock Option Plan (ESOP), Incentive Stock Options (ISO), Employee Stock Purchase Plans (ESPP), Non-Qualified Stock Options (NQSO/ NSO)


Allows employees to become share holders at a future date and at a pre-determined price, usually lower than the fair market price.


2/ AWARD BASED

Restricted Stock Units (RSU), Unrestricted Stock Unit (USU), Common Stock Alternative (CSE)


Allows employees to become share holders today but applies restrictions on the transfer-ability or ownership to safeguard company interests.


3/ EQUITY MIMICS

Phantom Stocks, Stock Appreciation Rights (SAR), Profit Pool, Strategic Deferred Compensation Plans, Profit Unit Plan (PUP)

Mimics equity interest but without altering or modifying the cap table to incentivize employees for current and future performance.

Some of the hot terms in stock options & what they mean


GRANT

Act of issuing a stock option award to an employee which describes his entitlement and the terms of such entitlement, usually read with the employment agreement


VESTING

The time period that an employee needs to wait for/ milestones which need to be reached/ performance that needs to be delivered when the employee can apply to receive the stock.


Few other vesting related terms:


Vesting schedule: Schedule of when what portion of stock becomes eligible for exercise


Accelerated vesting: Procedure for premature vesting in situations such as buy-out/ merger


Trigger vesting: Single/ Double Trigger of sale of business +/- employee exit that leads to vesting


Cliff vesting: Time period during which no vesting happens till a certain date


EXERCISE

Act of buying the stock unit by paying the ‘Exercise amount’, if any, to convert the vested options to actual stock.


STRIKE PRICE/ EXERCISE AMOUNT

Price that the option holder pays in order to acquire the stock units which he is entitled to which is usually at a highly discounted price.


LOCK-IN PERIOD

Committed period that the employee needs to hold on to such ESOPs & be in employment to be eligible for the exercise of the stock options.


HOLDING PERIOD

Period that the employee needs to hold shares received by him by exercise before he can sell/ otherwise transfer them.

Want to get your hands on our latest whitepaper on Making Stock Options work?


[ Download Stock Options DIY ]

I hope that you find this information as a conversation starter with your CXOs. If you would like to have a conversation on how you can achieve this for your organization or need assistance in sourcing good partners, we can be reached on connect[at]prequate.in.

#finance #prequate #business #employees #stocks #ESOPs #stockoptions #payroll #compensation #people #startup #motivations