Equity Incentive Plans
By Andrew R. Silverman, Esquire-
Finding, training, and retaining top talent in a competitive marketplace can prove difficult for management. Additional compensation or large bonuses may be out of the question and, increasingly, employees are asking for “skin in the game”—that is, equity or ownership interest in the company. Management may be reticent to award straight ownership for various reasons, such as a desire to avoid conveying the voting rights that equity often carries. Fortunately, the following equity incentive plans are possible alternatives:
- Restricted Stock – Restricted Stock is, in fact, an award of actual stock in the company. Unlike other stock, however, Restricted Stock is typically granted to the recipient subject to the company’s repurchase or other forfeiture. A company, for instance, may repurchase the Restricted Stock upon the employee’s termination of employment. Also, Restricted Stock is usually not transferable by the recipient, so management need not worry about unwittingly bringing on partners it does not know.
- Restricted Stock Units – Restricted Stock Units are, simply, a right to receive shares of the company’s stock at a later date (e.g., after three years of continued employment or the achievement of the recipient of certain goals). Management may organize the plan such that, on the vesting date, the recipient can take the cash value of the stock rather than the actual stock.
- Stock Appreciation Rights – An award of Stock Appreciation Rights does not immediately transfer stock in the company to the recipient. Instead, it awards the recipient the right to receive the appreciation in value that the awarded “stock” earns during a time period provided in the Stock Appreciation Rights award agreement. This appreciation value can be paid out either in actual stock or cash.
- Stock Options – A stock option is the right of the recipient to purchase stock in the company at a specified time and at a specified price. The company does not award stock to the recipient on the grant date; rather, it merely awards the recipient the option to purchase the stock pursuant to the terms of the award agreement, which may call for the achievement of certain objectives or years of service before the option can be exercised.
- Performance Awards – A Performance Award vests upon the achievement of a certain goal set forth in the Performance Award Agreement, such as a sales objective. Once the Performance Award vests, the recipient can often elect to receive common stock or the cash value.
- Phantom Stock – Phantom Stock is not stock at all. It is the contractual right of the recipient to receive the equivalent value of the stock upon the occurrence of certain events specified in the award agreement. Often, this is upon the sale of the company.
Most of the equity incentive plans discussed above are available to both corporations and limited liability companies.
Management’s decision to adopt any incentive equity plan should be made carefully. Each type of award has advantages and disadvantages and, depending upon the company’s tax election, it is not the case that each plan will be available as an option. Further, if not drafted carefully, a plan may carry an unintended tax impact on both the company and the employee.
A properly drafted and implemented incentive equity plan, however, will often contribute to the growth, proficiency, and morale of the company in addition to making the company more competitive in its search for talent.
Andrew Silverman is an attorney in the firm’s Business Department whose practice includes complex corporate governance matters. If you are considering implementing an equity incentive plan for your company or have been offered an incentive equity award and desire guidance, call 610-840-0286 or email [email protected].