Available equity compensation structures

The following are the types of equity awards commonly used by startups.

 

Restricted Stocks

Stock Options

Restricted Units

Stock Appreciation Rights

Phantom Stock

 

Restricted stock is typically a common stock of the company, the ownership of which is subject to one or more contractual restrictions. The main restrictions are prohibition of resale, vesting schedule, the company’s right to repurchase in some unusual situations.

 

Stock option gives its holder the right to purchase the stock of the company at a fixed price during some period of time in the future. The idea behind is that the value of the stock will increase, but the holder of the option will be able to get it at the earlier determined price. Stock option does not grant equity outright like in case with equity compensation that uses restricted stock, but only the right to buy the stock in the future. This right may also be conditioned and depend on imposed vesting schedule, time period, and other matters.

 

Restricted Stock Units (RSU) is the right to receive from the company, after the satisfaction of vesting requirements, either a) a specified number of shares or b) cash equal to the value of a specified number of shares.

 

A stock appreciation right (SAR) allows an employee to receive cash or stock equal to the appreciation in value of a share of the employer stock from the grant date until the date the SAR is exercised. It differs from Restricted Stock Units because of this built-in purchase or exercise price.

 

Phantom stock is a special equity compensation form developed for those extremely resistant to diluting company’s equity. It grants phantom shares to the recipient, which are not actual shares, but exist only on paper and will be paid in a certain period of time and/or upon the occurrence of a certain event (e.g. an IPO of the company or private sale). The recipient of the phantom stock never receives actual shares, only monetary benefits equivalent to the number of shares he would hold otherwise.

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