Equity Compensation at Tech Companies

Restricted Stock Units (RSUs), Employee Stock Purchase Plans (ESPPs), and Stock Options are all forms of commonly offered equity compensation at tech companies in the United States.

Overview of Tech Firm’s Equity Compensation Methods

RSUs are typically granted as a form of compensation to employees and are a promise to deliver company stock at a future date. RSUs often vest over a period of time and are subject to certain conditions. Once vested, the employee receives the company stock, and can either hold onto it or sell it on the open market.

ESPPs allow employees to purchase company stock at a discounted price through payroll deductions. The purchase price is typically set at a discount to the current market price, and employees can opt in to buying shares over a specified period, such as six months or a year. At the end of the purchase period, the shares are purchased at the discounted price, and the employee can either hold onto the stock or sell it on the open market.

Stock options that are granted to employees and allow them to purchase company stock at a predetermined price (the exercise price), typically the market price at the time of the grant. ISOs are subject to certain conditions and restrictions, such as vesting schedules and expiration dates, and must be exercised within a specific timeframe. If the stock price increases after the option is granted, the employee can purchase the stock at the lower exercise price and sell it on the open market for a profit.

Important Details About Restricted Stock Units (RSUs)

Restricted Stock Units (RSUs) are a common form of equity compensation offered by technology companies to their employees. Here are a few important things for technology company employees to know about RSUs:

Vesting Schedule: RSUs typically have a vesting schedule, which means that employees do not immediately receive the stock when the grant is made. Instead, they receive the stock over time, subject to certain conditions. The vesting schedule can vary from company to company and may depend on the employee’s job level or tenure.

Taxes: RSUs are subject to taxes. When the RSUs vest, the employee is considered to have received income equal to the fair market value of the stock at that time. This income is subject to federal income tax, as well as Social Security and Medicare taxes.

Sale Restrictions: Once the RSUs vest and the employee receives the stock, there may be restrictions on selling the stock (especially for executives or others with knowledge of non-public financial information). Some companies may require employees to hold the stock for a certain period before selling, or may limit the number of shares that can be sold at any given time.

Stock Price Fluctuations: The value of RSUs can fluctuate based on the performance of the company and the stock market. This means that the value of the RSUs at the time of vesting may be different than the value at the time of the grant. Employees should be aware of this potential volatility and consider diversifying their investment portfolio.

For insights on selling RSUs, see prior post: When to Sell RSUs for Tech Employees.

Overall, RSUs can be a valuable form of compensation for technology company employees, but it’s important to be aware of the details and implications of the RSU grant to make informed financial decisions.

Important Details About Employee Stock Purchase Plans (ESPPs)

Employee Stock Purchase Plans (ESPPs) are a form of equity compensation offered by many technology companies to their employees. Here are a few important things for technology company employees to know about ESPPs:

Discounted Stock Purchase: ESPPs allow employees to purchase company stock at a discounted price. The purchase price is typically set at a discount to the market price, and employees can choose to buy shares over a specified period, such as six months or a year. At the end of the purchase period, the shares are purchased at the discounted price, and the employee can either hold onto the stock or sell it on the open market.

Contribution Limits: There may be limits on how much an employee can contribute to an ESPP. These limits can vary from company to company and may depend on the employee’s job level or salary.

Taxes: ESPPs are subject to taxes at the time of sale. The discount on the stock purchase is considered income and is subject to federal income tax. When the stock is sold, any gains or losses are subject to capital gains tax.

Risks: Investing in company stock through an ESPP can be risky, as the value of the stock can fluctuate based on the performance of the company and the stock market. Employees should consider diversifying their investment portfolio to mitigate this risk.

Overall, ESPPs can be a valuable form of compensation for technology company employees, but it’s important to be aware of the details and risks of the plan to make informed financial decisions.

Important Details About Non-Qualified Stock Options (NSOs)

Non-Qualified Stock Options (NSOs) are a form of equity compensation offered by technology companies to their employees. Here are a few important things for technology company employees to know about NSOs:

Tax Implications: Unlike ISOs, NSOs are subject to ordinary income tax rates on the difference between the exercise price and the fair market value of the stock on the exercise date. This means that employees may owe taxes immediately upon exercising the option.

For more on incentive stock options (ISOs) see: Incentive Stock Options (ISO): Definition and Meaning.

Vesting Schedule: NSOs typically have a vesting schedule, which means that employees do not immediately receive the option when the grant is made. Instead, they receive the option over time, subject to certain conditions. The vesting schedule can vary from company to company and may depend on the employee’s job level or tenure.

Exercise Price: The exercise price of an NSO is the price at which the employee can purchase the company stock. This price is typically set at the fair market value of the stock on the date the option is granted. If the stock price increases over time, the employee can exercise the option and purchase the stock at the lower exercise price, potentially resulting in significant gains.

Risks: NSOs can be risky, as the value of the stock can fluctuate based on the performance of the company and the stock market. Employees should consider diversifying their investment portfolio to mitigate this risk.

Overall, NSOs can be a valuable form of compensation for technology company employees, but it’s important to be aware of the details and risks of the option grant to make informed financial decisions.

Communication with Employer

It’s important for employees to communicate with their employer and stay informed about the specifics of their equity compensation. This includes understanding the vesting schedule, any sale restrictions, and the tax implications of the RSUs, understanding the contribution limits, purchase period, and tax implications of the ESPP, and understanding the vesting schedule, exercise price, and tax implications of the NSOs.

Summary of Technology Employer’s Equity Compensation

In summary, RSUs, ESPPs, and NSOs are all forms of equity compensation at tech companies in the United States. RSUs are a promise to deliver company stock at a future date, ESPPs allow employees to purchase company stock at a discounted price, and NSOs are options to purchase company stock at a predetermined price. The specifics of each program can vary depending on the company and the terms of the individual grants.