Equity compensation has been used by many public and some private companies, especially startups.
Equity compensation is non-cash pay that represents ownership in the firm. This type of compensation can take many forms, including options, restricted stock, and performance shares. Equity compensation allows the employees of the firm to share in the profits via appreciation and can encourage staff retention, particularly if there are vesting requirements. Equity compensation has been used by many public and some private companies, especially startups. Recently launched firms may lack the cash or want to invest cash flow into growth initiatives, making equity compensation an option to attract high-quality employees. Traditionally, tech companies in both the start-up phase and more mature companies have used equity compensation to reward employees.
Types of Equity Compensation
Companies that offer equity compensation can give employees stock options the right to purchase shares of the companies’ stocks at a predetermined price, or exercise price. This right may vest with time, allowing employees to gain control of this option after working for the company for a certain period of time, giving them the right to sell or transfer the option. This method encourages employees to stick with the company for the long term. There are different types of equity compensation, such as non-qualified stock options (NSO) and incentive stock options (ISOs). ISOs are only available to employees and not non-employee directors or consultants and have special tax advantages. With non-qualified stock options, employers do not have to report when they receive this option or when it becomes exercisable. Restricted stock requires the completion of a vesting period. This may be done all at once, equally over a set period, or any other combination. RSUs are similar, but they represent the company’s promise to pay shares based on a vesting schedule. Performance shares are awarded only if certain specified measures are met. These could include metrics, such as an earnings per share (EPS) target, return on equity (ROE) or the total return of the company’s stock in relation to an index. Typically, performance periods are over a multi-year time horizon. To know more about equity compensation, check out our blog or knowledge center here. And if you have not yet started using Eqvista as your cap table application, it’s time to do so. Check out our cap table software here & contact us today!