Startup Legal Talks (6)

RSU is not an option! How do Huawei's virtual shares work? Overview of Employee Compensation Incentive Methods|Virtual Shares, Stock Appreciation and Dividend

In the last issue, we introduced the first three of the six common employee equity incentives, Restricted Stock, Stock Option and Restricted Stock Unit (RSU).

Today, we will introduce the remaining three common employee equity incentive methods, Stock Appreciation Right, Phantom Stock, and Employee Stock Purchase Plan.

4. Stock Appreciation Right

The fourth is the right to share appreciation and dividends. Let's analyze this incentive method from several aspects:

(1). Judging from the name, the focus is on the appreciation and the spread, which is similar to options. But unlike options, the result of options is that employees get stock. The final result of the stock appreciation dividend right is that the employee gets the corresponding value-added dividend, that is, cash.

(2). Another point that is different from options is that stock appreciation and dividend rights are usually late-stage or listed companies, because at this time the company really has cash to issue. Early-stage companies are very cash-strapped.

(3). This is similar to RSU. But let’s think about it, in the later stage of development or listed companies are relatively stable, and the stock price fluctuations are not too big, then in fact, the price difference of the stock appreciation and dividend rights is relatively small. This also means that the treatment of the stock appreciation right (Stock Appreciation Right) is usually not as good as that of the RSU, and the actual benefits for the employees are not much.

In fact, when it comes to this, you may also find that from the different types of employee equity incentives you get, you can also see your status in the company's mind and the company's sincerity towards you.

5. Phantom Stock

Phantom stock, also called shadow stock. When it comes to virtual stocks, the one we hear most often is the example of Huawei[1]. In fact, there are two biggest differences between virtual shares and other employee incentives:

(1). One is that virtual shares only have dividend rights but no voting rights. This is the same as RSU and stock appreciation right. That is to say, when shareholders pay dividends at the end of the year, you will pay dividends together, but you cannot vote together when voting at the shareholders meeting. . Some people may think that I am only a few tenths of a percent, and that's the same as voting or not voting. However, if you have equity, even a small shareholder has the right to inspect the company's accounts, financial statements and legal documents. And if it is a virtual stock, no matter how big the dividend right is, it is only waiting for the share of the money.

(2). The other is that virtual shares are only enjoyed by employees when they are in office, and they are gone after resignation. Even the mature parts are confiscated when they resign. Therefore, virtual shares also have another name called "post shares", and the other types can take away mature parts after resignation.

It is precisely because of this feature of virtual shares that it is often suitable for companies that are not listed and do not plan to go public, but have relatively high cash flow. Huawei is actually one of them. If your company is also of this type, and you want to motivate employees If so, consider virtual stocks. Because for this kind of company, employees don't expect your stock to grow hundreds of times and then sell it on the stock market. More important is the company's earnings this year. This approach is more similar to a way of calculating bonuses for employees.

6. Employee Stock Purchase Plan

Finally, let's take a look at the Employee Stock Purchase Plan (Employee Stock Purchase Plan). Don't look at the long name. In fact, its concept is the most simple and clear of the types we talked about today. To put it bluntly, the company gives you a discount, which allows you to buy the company's stock at a low price. This kind of incentive method is also used by listed companies. For example, the stock price of this listed company on the open market is $100 per share. The company gives you a 50% discount, and you can buy the company's stock for $50 per share. Then go to the market and sell it, which is equivalent to earning 50 yuan for nothing. Then some people will ask, and if you say that, you might as well give me $50 directly. In fact, this approach is very clever, because during the whole process, the employee spent $50, and a shareholder in the market gave $100. The company did not use the cash flow, but gave a discount coupon, which served the purpose of borrowing flowers and offering Buddhas.

Well, now that we have introduced all six ways of employee equity incentives, let's summarize:

· Option (stock option) is used by start-up companies. The focus is on the price difference. By exercising the option, the employee finally gets the stock.

· Restricted Equity Units (RSUs) are used by late-stage unlisted companies or companies that have already been listed. The focus is on the full value of the stock, not the price difference. The employee gets the stock, but it is usually sold and realized quickly.

Restricted stock (Restricted Stock) is used by startup founders, and what they get is stock.

· Phantom Stock is a company that is not listed but has a very good performance and a large cash flow. The focus is on the full price of the stock, and employees get cash.

· Stock Appreciation Right is used by mature unlisted companies or companies that have already been listed.

· Employee Stock Purchase Plan (Employee Stock Purchase Plan) is used by listed companies, that is, the company gives employees a discount coupon to buy the company's stock.

We promised you a video to explain RSU in detail before, so in the next issue we will analyze how RSU works through Starbucks' coffee bean stock.