Equity incentive awards: Overview, definition, and example
What are equity incentive awards?
Equity incentive awards are compensation or benefits given to employees, executives, or other stakeholders in the form of company stock or stock options. These awards are designed to align the interests of employees or other recipients with the company’s long-term success by offering them ownership stakes or the right to purchase stock at favorable terms. Equity incentive awards are often used as part of a broader compensation package to attract, motivate, and retain key talent, especially in startup or high-growth companies.
There are various types of equity incentive awards, including stock options, restricted stock units (RSUs), stock grants, and performance shares. These awards can vest over time, require specific performance goals to be met, or be tied to certain milestones or company achievements.
Why are equity incentive awards important?
Equity incentive awards are important because they provide employees and stakeholders with a sense of ownership and direct financial interest in the company’s success. By offering stock or options to purchase stock, these awards incentivize employees to work towards increasing the company’s value, knowing that their efforts will directly impact their financial gain.
For businesses, equity incentive awards are a valuable tool for attracting high-quality talent, particularly when they may not have the financial resources to offer large salaries. They can also help to retain employees by giving them a reason to stay with the company for a longer period, as many equity incentives are subject to vesting schedules.
Understanding equity incentive awards through an example
Imagine you are an employee at a fast-growing technology startup. As part of your compensation package, the company offers you 1,000 stock options, which allow you to purchase shares of the company at a fixed price (say $10 per share) after a 4-year vesting period. The stock options become valuable if the company’s stock price increases above $10 during that time, allowing you to purchase shares at the lower price and potentially sell them for a profit.
Alternatively, if the company grants you restricted stock units (RSUs), you are awarded 1,000 shares that will be transferred to you as they vest over a 4-year period. The shares have real value once they vest, and they can be sold or held, depending on the company’s policies and the stock’s market price.
In both examples, the equity incentive awards are designed to encourage you to stay with the company and contribute to its success, as your financial reward is tied to the company’s performance and stock value.
Example of an equity incentive award clause
Here’s an example of what an equity incentive award clause might look like in an employee agreement:
“The Company grants the Employee an equity incentive award in the form of 1,000 stock options, with an exercise price of $10 per share, subject to the terms and conditions outlined in the Company’s Stock Option Plan. The options will vest in equal installments over a period of four years, with 25% of the options vesting on the first anniversary of the grant date and the remainder vesting quarterly thereafter. The options are exercisable for a period of 10 years from the grant date, subject to the Employee’s continued employment with the Company.”
Conclusion
Equity incentive awards are an effective way for companies to motivate and retain employees by offering them a stake in the company’s future success. These awards help align the interests of employees with those of the company’s shareholders, as the value of the awards is directly tied to the company’s performance and stock price. Whether in the form of stock options, RSUs, or other equity-based compensation, these awards provide employees with the opportunity to share in the growth and success of the company, making them an important tool in modern compensation strategies.
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.