Equity Compensation
Getting a handle on you equity compensation can make a big difference.
We help map out the potential benefit, risk, and tax implications of your stock comp package.
Incentive Stock Options (ISOs) are options granted to employees of a company (or its subsidiaries) the right to buy shares of the company at a predetermined price. The holders of ISOs tend to receive better tax treatment than Non-Qualified Stock Options (NQSOs).
Non-Qualified Stock Options (NQSOs) are options granted to employees, contractors, and consultants of a company (or its subsidiaries) which gives the option holder the right to buy shares of the company at a predetermined price. The holders of NQSOs tend to receive worse tax treatment than Incentive Stock Options (ISOs).
Restricted Share Units (RSUs) are shares of stock your employer gives you, but you cannot sell them until you have vested (usually over a few years).
Option Plan- Options are usually given under an plan (but sometimes NQSOs don’t have one). Stock comp such as RSUs and ESPPs can also have a formal plan document as well.
Option Agreement- An O.A. spells out all of the particulars of the option. This will include when you can exercise, number of shares covered, and the purchase price.
Vesting- This is when you can do what you want with the option (exercise to buy the stock or let it expire).
Exercise- This is when you use your privileges under the option contract to buy the stock. You will buy it at the “strike” or exercise price.
Strike/Exercise Price- The price that you will buy the stock at under the agreement should you choose to exercise the option. The idea is that the strike price is less than the current trading price when you go to exercise.
The Spread- is (Stock Price - Strike price). If the spread is a positive number, you’ re “in the money” and if the spread is a negative number, you’re “under water”.