Company equity awards: Overview, definition, and example
What are company equity awards?
Company equity awards are a form of compensation that companies offer to their employees, executives, or directors in the form of company stock or stock options. These awards are typically used as incentives to align the interests of employees with the long-term success of the company. Equity awards can come in various forms, such as stock options, restricted stock units (RSUs), or performance shares, and are designed to reward employees for their contributions to the company’s growth and success. The idea is that as the company’s stock value increases, so does the value of the equity award.
Why are company equity awards important?
Company equity awards are important because they serve as a tool for retaining top talent, motivating employees, and creating a sense of ownership in the company’s success. By offering equity as part of a compensation package, companies can attract skilled employees and incentivize them to work hard towards increasing the company’s value. Additionally, equity awards are often tied to performance goals, meaning employees only fully benefit from them if the company meets certain milestones or achieves financial growth, encouraging long-term commitment and alignment with company goals.
Understanding company equity awards through an example
Let’s say a company offers an employee 1,000 stock options as part of their compensation package. The options allow the employee to purchase company stock at a set price (say $10 per share) within a certain period (say 5 years). If the company’s stock price rises to $20 per share, the employee can exercise their options and buy the stock at $10, making a profit of $10 per share. If the stock price remains below $10 or the employee leaves before the vesting period ends, they won’t benefit from the equity award.
Another example could involve restricted stock units (RSUs), where an employee is granted 1,000 RSUs that will vest over four years. This means the employee receives 250 RSUs per year, and once vested, they receive the equivalent value in company stock. If the company’s stock price increases over the four years, the employee benefits from the increase in stock value when the RSUs vest.
Example of a company equity award clause
Here’s how a company equity award clause might appear in an employee contract:
“As part of your compensation, you are granted 1,000 stock options with an exercise price of $10 per share. These options will vest over a period of 4 years, with 25% vesting each year. You may exercise your options within 10 years from the grant date, subject to the terms and conditions outlined in the Company’s equity incentive plan.”
Conclusion
Company equity awards are an effective way for businesses to motivate and retain employees by offering them a stake in the company’s success. These awards not only provide financial incentives but also encourage employees to think and act like owners, aligning their efforts with the company's long-term goals. Understanding the types of equity awards available, such as stock options or RSUs, and how they work can help both employers and employees make informed decisions about compensation and performance goals.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.