Purpose
Equity Grants are designed to directly align employee rewards with an increase in the value of stock. They are intended to motivate employees to increase the overall value of the company. Equity grants may be outright shares of stock with accompanying ownership interest, or options that bestow the right to purchase actual company stock in the future at a price established on the grant date. Either grant type may result in the employee becoming an actual minority shareholder.
Design
Stock grants generally conform to standard features to comply with accounting, tax, legal and regulatory requirements. Some of the required or customary design features are highlighted below.
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Stock and options may be granted to selected individuals or groups of employees. Grants may be made periodically (annually) or on a single date.
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The number of shares/options may vary by individual and may be based on individual performance or other criteria.
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The rights to sell shares or exercise options typically vest to employees based on continued employment over a 3 to 5 year period, thus providing a strong retention incentive. The company has a significant latitude regarding the actual vesting schedule.
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Options may be granted as Nonqualified or Incentive Stock Options, each with different individual and company tax ramifications and design limitations.
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Options are exercised by delivering money to the company equal to the original grant price times the number of shares.
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Equity grants may be accompanied by buy-sell agreements to restrict third-party stock sales.
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Equity grants carry the potential for large executive gains tied to stock price growth.
Summary
Equity grants effectively tie executive wealth directly to the increased value of the company and may be highly motivational to employees who desire an ownership interest. Grants are particularly viable in companies that are now or plan to go public within the next 3 to 5 years, thereby providing an active market for the shares.
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