Equity, Stock Options, RSUs – The Basics

Equity, Stock Options, RSUs – The Basics

So, your employer granted you stock options, restricted share units (RSUs), phantom stock options or some other kind equity compensation. Great news, right? Or is it? Over the years, countless employees have confided in me that they aren’t exactly sure what they have received, what the value is, or how to realize the value. If this sounds familiar, read on!

Understand the Jargon 

Equity compensation comes with a vocabulary all its own – vesting, exercise price, tranches, stock options, restricted shares, phantom stock, equity plan, to name a few such terms.  What are vested options vs. unvested options? What is a stock option vs. stock?  A restricted share unit vs. a share? These words and concepts can be the difference between a big  dollar equity payout and zero. If you don’t know the jargon, it will be impossible to understand what you’ve been granted, so you need do some research.

Ask Questions 

All employees are entitled to understand their compensation packages. Unfortunately, when it comes to the daunting landscape of equity compensation, it can be hard to know what questions to ask, or even whom to ask. And when equity compensation is part of a new hire package, many are understandably reluctant to ask for details. As a starting point, ask questions of the company’s human resources department or the recruiter who hired you. If they can’t help you, find someone who can. Always ask for copies of documents that are referenced in the compensation letter such as the underlying stock option or equity “plan”, and the “standard equity grant agreement.” The small print really can make all the difference.

What Happens if You Leave the Company? 

Equity compensation is generally used as a retention tool, sometimes referred to as “golden handcuffs” to keep you with the company. This means that payouts may only happen if you stay for a long period of time, and have no value if you leave the company before a set date. For this reason, it’s important to know what happens to your equity compensation if you resign or your employment is terminated. For example, an ill-timed resignation may mean you lose your right to significant portions of your equity package. This underlines the importance of taking the time to ask questions at the outset to avoid nasty surprises down the road. If you are thinking of quitting or have been terminated, it’s a good idea to consult with an employment lawyer who has experience with equity compensation as there could be a lot at stake.