Employers often want employees to think like company owners, by issuing stock, options to purchase stock or other forms of equity equivalents, such as phantom stock. There are a variety of methods for gaining ownership in a company, each of which differ significantly to both the company and the employees.
Wrongful cancellations of employee stock options and grants, breach of option agreements or wrongful termination of options are often sufficient grounds for legal action.
We are now firmly entrenched in the Say-on-Pay era and the varying consequences that comes with it. Say-on-Pay requires some companies to approach their shareholders to vote on executive compensation. While that vote is often non-binding, the implications can be significant to the end results.
So, what are we talking about? Companies typically compensate their executives by making equity and equity style grants. Each equity compensation agreement is different, and it is important that the employee thoroughly reads through the details in the plan and granting agreements, especially checking the strike price, acceleration provisions, the benefits, and the dates from which it can be exercised.
The most common types of equity are:
- Incentive stock options (ISOs) can only be granted to employees and is the only equity option that offers favorable tax treatment. Usually, an employee is given the option to purchase stock at a predetermined price. This is the most common form of equity offered to employees.
- Non-qualified stock options (NQSOs) are similar to ISOs but without favorable tax deductions. This means the employee is taxed on any profit made when purchasing the stock at its cheaper, predetermined price.
- Stock Settled Appreciation Rights (SSARs) grants an employee payment in stock. The payment is equal to the amount which the value of stock has increased since the employer-employee agreement was made.
- Phantom Stock is similar to SSARs, but under a phantom equity agreement, the employee is paid in cash instead of stock. The payment is still equal to the amount which the value of the stock has increased, but the employee receives no actual stock.
- Restricted Stock Grants are a fixed amount of shares that are given to the employee. Shares under a restricted stock award agreement are subject to a right of forfeiture or repurchase by the company.
- Restricted Stock Units (RSUs) is when an employee is granted stock to be paid at a specified date in the future. An award under a restricted stock unit agreement is also subject to forfeiture or repurchase by the company. RSUs are usually used by newer companies that are looking to grow.
Knowing exactly what type of equity that your company offers to you is crucial, both to know what you’re getting and to understand if the company has breached its equity grant agreement. As you can see, each type of stock comes with its own set of rules that an employer must abide to, each of which results in different benefits to the employee. If you are negotiating for one of these grants, believe your company has breached one of the rules or you believe you’ve earned equity you never received, please contact us today.
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This information is not a do-it-yourself guide to resolving employment disputes or handling employment litigation. While some may find this useful for understanding the basic issues and their legal context, it is NOT a substitute for experienced legal counsel and does not provide legal advice. Please contact the team at Gordon Law Group to discuss your specific case.