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Understanding equity compensation plans

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Topic overview

Whether employed at a startup company in pre-initial public offering (IPO) mode or a well-established public company, equity awards can be an important part of compensation.

Understanding the different types of awards, when they vest, how you acquire the stock and the tax obligations are important to get the most value from this form of compensation.

Is this relevant to my clients?

Employees receiving equity as part of their compensation can experience significant wealth creation, that is, if they understand how it operates and what the risk factors are:

  • Is the employer stock in restricted form or exercisable form? Must they act on it?
  • Is the employee prepared to handle a cost to acquire the stock and tax obligations on the stock?
  • Do you have an opinion on the direction of the stock price?

Managing equity compensation is very case specific. Understanding the costs and developing a strategy around equity compensation can add tremendous value to an individual’s bottom line.