Equity compensation plans come in many forms, and each has its own set of contractual guidelines for employees to follow.
Employee Stock Purchase Plans (ESPPs)
Employers often provide perks like employee stock purchase plans to retain and attract top talent. With ESPPs, employees get the chance to buy company stock through payroll deductions made after taxes have been withdrawn.
It is possible for the plan to stipulate that employees will pay less than the stock's fair market value per share. If the ESPP meets the Internal Revenue Code section 423, it can offer discounts of up to 15 percent off the stock's purchase price.
Employees with stock options have the right to purchase a specified number of shares in a company at a specified price and date. Stock options are not stock ownership but a contract granting you the right to buy the stock at a specified price and date.
For example, a company may give you stock options stating that you can purchase 1000 shares in the company for 60 cents per share after a specific date. That means that after the specified date, regardless of the current stock price, you can buy 1,000 shares for 60 cents each, for a total of $600. If the shares are worth $2.50 per share when you exercise the options, you still pay only 60 cents per share and make an immediate profit of $1.90 per share, or a total of $1,900.
Restricted stock is company stock that is granted to employees with certain restrictions until the vesting date. There are a couple of key differences between certain restricted stock offerings companies will offer as part of their equity compensation packages.
Restricted Stock Units (RSUs)
Stocks granted to an employee with limited ownership rights are known as restricted stock units. In most cases involving RSUs, an employee is not entitled to full ownership of the stock until they have worked for the company for a certain number of years or achieved a certain level of performance. After receiving their shares in full, the employee can enjoy all the voting rights and dividends those shares offer.
Restricted Stock Awards (RSAs)
Despite similar titles, restricted stock awards and restricted stock units carry different stipulations. The key difference between them is that, unlike RSUs, RSAs are granted up front, potentially giving employees voting rights and dividends without having to wait for shares to vest. They also allow employees to take advantage of the 83(b) election.
Stock Appreciation Rights
Employees who receive Stock Appreciation Rights (SARs) can participate in the upside potential of a stock, similar to a stock option. When you exercise a SAR, you receive the increase in the value of the company’s stock shares above the predetermined price of the award.