As an introduction to a next post about an overview of tax issues for equity-based compensation, and as this may be a little difficult to apprehend for people who are not familiar with these questions, find below a glossary of standard terms used in Equity compensation plans.
Keep in mind that it is specifically dedicated to a better understanding of that specific matter and not in the general framework of finance or portfolio management.
Olivier Dellacherie, Executive chairman, Talent4Boards Inc.
B
Board Of Directors (BOD): The directors are a company’s most senior managers and are elected to run the company by shareholders.
C
Call: a type of stock option that gives its holder the right to buy shares of stock for a specified option price which can be exercised for a specified period.
Common stock (also called “ordinary shares“): A security that represents ownership in a corporation. In the event of liquidation, common shareholders have rights to a company’s assets only after bondholders, preferred shareholders and other debt holders, and are on the bottom of the priority ladder for ownership structure.
D
Deferred Compensation: Benefits, bonuses, incentives, and other forms of remuneration that have been earned but are actually paid in an accounting period later, typically under a plan; Money or other compensation that has been earned but not yet received by the earner.
Dilution: a decrease in the equity position of a share of stock because of the issuance of additional shares.
E
Equity Options: are Stock-options using individual underlying common stock.
Employee Stock-Option: is a kind of Stock-option that is offered by employers to their employees as part of the compensation
Employee Stock Purchase Plan / ESOP: Stock purchase plan which is a kind of employee Stock- option plan that receives favorable tax treatment.
Exercise: an action by which the holder of the option chooses to implement his right to buy the underlying stock.
Exercise Price (also called Strike Price)
Exercising: when the holder of the options informs the issuer of his intention to purchase the underlying shares.
Expiration date: The day on which an option becomes void and the right to exercise ceases to exist. Holders of options should indicate their desire to exercise, if they wish to do so, by this date. If you plan on exercising the option, you must do so before the expiration date.
F
Face Amount (face Value): The value of a security as printed on the document. Throughout the life of a security, its market price will fluctuate, not its face value.
Fair Value: the worth of a Stock-option as determined by an agreed mathematical model.
Founder Stocks: are typically common stocks subjected to vesting provisions, and that founders issue to themselves when they form the company, and which can be applied for early team members too. Their special vesting provisions are extended to the investors once capital invested.
G
Grant: The issuance of an award under a stock plan, such as a stock option or shares of restricted stock. Grants are usually conditional upon specific qualifications as to the use, maintenance of specified standards or results.
I
Illiquid: Asset which cannot be quickly and easily converted into cash, such as not listed stock.
Intrinsic value: The value of an option if it were to expire immediately with the underlying stock at its current price; this is the difference between the stock price and the striking price, if that difference is a positive number, or zero otherwise
Issue price (Par value): the price of shares when they are offered for sale for the first time by the company
L
Liquidity Event: An event that allows initial investors in a company to cash out some or all of their ownership shares, as an exit strategy for an illiquid investment. Liquidity events are typically used in conjunction with venture capital/angel investors or private equity firms, which will aim to reach one within a reasonable amount of time after initially investing. The most common liquidity events are initial public offerings (IPOs) and direct acquisitions by other corporations or private equity firms.
Listed Company (quoted company): A company that has satisfied the requirements for its shares to be listed on a recognized investment exchange (RIE), such as NYSE or Euronext. In the case of the LSE, a company that has obtained permission for its shares is admitted to the Daily Official List.
Lock-in: A specified time period that an investor is locked into an investment. An example would be a period following a flotation when major shareholders agree not to sell their holdings. The objective is to give investors confidence that the management and key shareholders do not intend to cash in their stock the moment the market opens.
Long term capital gain: An increase in the value of a capital asset that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. If the holding period exceeds one year, it is called Long Term.
M
Money
- At-the-money: an option is said to be at-the-money if the strike price of the option is the same amount as that of the underlying stock price.
- In-the-money: A term describing any option that has intrinsic value. An option is in-the-money if the underlying stock price is higher than the strike price of the option.
- Out-of-the-money: A Stock-option is out-of-the-money if the strike price is higher than the market price of the underlying security. The intrinsic value of the option is zero.
O
Option (also call Stock-Option)
Abandoned Option: Where an option is neither sold nor exercised but allowed to lapse at expiry.
P
Phantom Stock: A type of incentive award in which the grantee does not receive real shares of stock on the grant date, but receives an account credited with a certain number of hypothetical shares. The value of the account increases over time based on the appreciation of the stock price and the crediting of phantom dividends. The payout may be settled in cash or stock.
Phantom option plan: A form of bonus compensation for an employee, in which the employee receives some units that equate to, but are not, shares in the company. The employee may sell his units at a later date and profit from any appreciation that has occurred.
Payment in kind: Also known as “paid in kind” or “PIK.” Payment made in goods and services, instead of cash.
Preferred Stock/Share: A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders, and the shares usually do not have voting rights, but details are specific to each corporation.
Q
Qualified opinion/accounts: Company accounts on which the auditor has expressed reservations about whether they represent an accurate and fair view of the company’s financial condition.
R
Restricted stock: common stocks issued to either early employees or Top Executives that are hired into the company fairly early in a company’s life, and have specific vesting provisions. The difference between restricted stock and options is that the employee owns the shares from the day of issuance and can get capital gains treatment on the sale of the stock if it is held for one year or more.
Restricted Stock Units (RSU): created to fix issues with options and restricted stocks, and have characteristics of both. An RSU is a promise to issue common stock once satisfied the vesting provisions which can include a liquidity event. When receiving an RSU, you are receiving something that is like an option but with a strike price null.
S
Stock exchange: Organized market where stocks and bonds are traded. There are stock exchanges in all the important financial centers of the world.
Stock Option: is a right, but not the obligation, issued to buy a common stock at an agreed-upon price (strike price), within a specified period (expiration date). Stock Options are the most common form of employee equity issued in start-up companies.
- Equity Options: are Stock-options using individual underlying common stock.
- Employee Stock-Option: is a kind of Stock-option that is offered by employers to their employees as part of the compensation.
- Incentive Stock Option: A stock option that specifies a set number of shares at a specified option price extending over a given period, which is free of tax when granting and when exercised. If the share is subsequently sold after a certain period after either the grant date or the date of the transfer to an employee, a reduced capital gains tax liability on profits will apply.
Strike Price (or Exercise Price): The stated price at which the option holder may buy the share upon exercise.
U
Unaudited opinion: Opinion by a Certified Public Accountant who has not yet reviewed the relevant financial documents.
Underlying stock: The stock subject to being purchased upon exercise of the option.
V
Vesting period: The time before shares/options are owned unconditionally by a grantee. If his/her employment terminates before this period ends, the company can buy back the shares/options at their original price. At the end of the vesting period, the grantee becomes entitled to the full benefits of ownership of shares/options.
W
(Equity) Warrant: is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date. Warrants and options are very similar in that the two contractual financial instruments allow the holder, exclusive rights to buy securities. Both are discretionary and have expiration dates, but Warrants are generally issued by private parties rather than a public company. Warrants issued by the company itself are dilutive and are frequently attached to preferred stock as a sweetener, and can be used to enhance the yield, and make stocks more attractive to potential buyers. Often, these warrants are detachable and can be sold independently of stocks. Warrants are longer-dated options and are generally traded over-the-counter.
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