Startup Legal Talks (5)

What you get is not an option! |RSU is not an option|The maturity period of an option is not necessarily 4 years|Amazon employees can only get 5% in the first year. Overview of employee compensation incentives - restricted stock units, stock options

Now most companies will receive a lot of contracts from HR on their first day of employment. HR will only tell you that this is an option for you, so sign it. However, if you have questions that you don't understand and want to ask HR, HR will say "you have to ask your own lawyer". Is the "option" in HR's mouth a real "option"? How many ways does the company motivate employees? Today we will talk about employee equity incentives.

Let’s first explain the concept of “employee equity incentives”. In fact, this concept is called employee compensation in English, and the literal translation is employee compensation. Because whether it is equity or options, it is a way to pay employees in disguise, so it is called "employee compensation" in English, but it is too easy for people to take the literal meaning and think that it is to pay money. Therefore, in order to facilitate understanding, I still call it equity incentive according to the Chinese habit. When you talk about employee equity incentives, you think they are options, but in fact, there are more than a dozen types of equity incentives in total, and there are six common ones, including restricted stock (Restricted Stock), options (stock option) and restricted stock options. Equity Unit (RSU), Stock Appreciation Right (Stock Appreciation Right), Phantom Stock, Employee Stock Purchase Plan motivating way.

1. Stock Option

Let’s first look at the one that everyone talks about the most and understands the least, and that is Stock Option. We seem to hear people everywhere say how many options I took in the company, but in many cases, they did not get options. [1]

From the name "options", we can see that this is not equity. We can understand options as "the power to expect shares", which means that, compared with equity, options are a state of over-the-counter queuing. Official field player.

To understand options, you need to understand three verbs, grant, vest, exercise, which are explained in detail in Lecture 4 of my "20 Lectures on American Company Law", so I won't repeat them here.

But I will only mention that the biggest difference between options and other types of employee equity incentives is the verb exercise, because options are an option to buy stocks. Employees need to exercise options to obtain stocks after the options are mature, that is, employees need to spend a sum of money to buy the stocks corresponding to these options. And several other employee equity incentive methods do not require this additional action of exercise.

2. Restricted Stock

Restricted stock (Restricted Stock) and Restricted Stock Unit (RSU) are just one word apart, but they are actually very different in nature. This is explained in more detail in Lecture 3 of my US Corporate Law 20 Lecture 3. It is briefly mentioned here that the final foothold of Restricted Stock is on the stock, which means that it is a real equity, and it is also the only real equity among the six common incentive methods. On the first day the company gives you 100 shares of restricted stock, you are already a shareholder of those 100 shares. So why is it called restricted equity? Where exactly is this restriction?

Because it also has a four-year term, and those four years are actually four years in which the company gradually loses the right to repurchase your stock. 100 shares of restricted stock, if you leave after the first year, then the company has the right to buy back the remaining 3/4, that is, 75 shares have the right to buy back. Note that this is a buyback option, not an automatic one. In real life, the company will forget to buy it back, resulting in the founder who leaves after a year taking 75 shares for nothing.

Because of the favorable conditions of restricted stock (Restricted Stock), usually restricted stock (Restricted Stock) is given to founders and co-founders, not ordinary employees.

3. Restricted Stock Unit

Let's talk about Restricted Share Units (RSUs), which are often mentioned, but in fact, RSUs are very different from the two mentioned above. We analyze this concept from several levels.

(1). Restricted stock units (RSUs) are usually used by listed companies or at least very late-stage unlisted companies, while restricted stock (Restricted Stock) and options (stock options) are usually used by very early-stage startups .

(2). Restricted share unit (RSU) does not require employees to spend money from beginning to end, and employees must spend money to exercise the option (stock option). Restricted stock (Restricted Stock) depends on the situation of the founder and the company and usually requires the founder to spend money to buy it.

(3). Restricted share unit (RSU) will be considered as W2 salary income ordinary income in taxation, with a tax rate of 30% or even 40%, which leads to the fact that employees usually need to sell as soon as possible after they get the RSU Realize it, otherwise by the end of the year, you will pay taxes but not make any money. Restricted stock and stock options, depending on the circumstances, will have some or all of the income that is considered capital gain and will be calculated at a lower 20% tax rate.

There is still a lot to talk about about restricted stock units (RSUs). In the next video, I will use the example of Starbucks "bean stock" to analyze it with you. However, because there are still three remaining employee equity incentive methods that have not been mentioned, we will talk about the other three employee equity incentive methods in the next issue.