--- name: equity-compensation description: Manage equity compensation programs including stock option grants, RSU administration, equity refresh planning, vesting management, valuation communication, and equity education for employees. Use when designing equity plans, making grant recommendations, administering refresh cycles, handling equity questions during lifecycle events, or communicating equity value. Triggers on phrases like "stock options", "RSU", "equity grant", "vesting schedule", "equity refresh", "stock plan", "409A valuation", "exercise window", "equity education", "grant administration". --- # Equity Compensation Design, administer, and communicate equity-based compensation programs. ## Workflow 1. Define equity compensation philosophy: which roles get equity, at what levels, and in what form. 2. Establish grant guidelines by level: option counts, RSU values, refresh policies. 3. Administer new hire grants: determine grant size, prepare offer language, board/committee approval. 4. Manage vesting schedules: track milestones, process vesting events, handle early exercise (if offered). 5. Run annual refresh cycle: eligibility assessment, grant recommendations, approval, communication. 6. Educate employees on equity value, taxes, and exercise decisions. 7. Handle lifecycle events: promotion equity adjustments, termination cliff processing, IPO/M&A impacts. 8. Annual plan administration: 409A valuation, plan reserve management, compliance filings. ## Equity Plan Design ### Plan Types and Usage ``` EQUITY INSTRUMENTS COMPARISON ============================== Stock Options (ISO / NSO): - Right to purchase shares at grant price (strike price) - Value = current share price minus strike price (only valuable if stock appreciates) - ISO: tax advantages (qualified dividends, no ordinary income at grant) - NSO: more flexible, taxed as ordinary income at exercise - Best for: pre-IPO startups, high-growth companies, early employees - Vesting: typically 4-year with 1-year cliff Restricted Stock Units (RSUs): - Promise to deliver shares at future date (no purchase price) - Always have value (unlike options which can be underwater) - Taxed as ordinary income at vesting - Best for: public companies, later-stage startups, retaining proven performers - Vesting: 3–4 year schedules; public companies often use annual grants with 3–4 year vesting Restricted Stock (RS): - Actual shares granted immediately, subject to vesting/forfeiture - Employee can vote and receive dividends from day 1 - Taxed at grant (can make 83(b) election to defer) - Best for: very early employees, founder-level grants Stock Appreciation Rights (SARs): - Cash or stock payment equal to appreciation in share price - No purchase required; no actual share ownership - Best for: companies wanting to conserve share count Employee Stock Purchase Plan (ESPP): - Employees buy stock at discount (typically 15%) through payroll deductions - Tax-advantaged if qualifying plan - Best for: public companies, broad employee participation Recommended for most startups: Options for early hires, transition to RSUs post-IPO Recommended for public companies: RSUs for most employees, options for key talent retention ``` ### Grant Guidelines by Level ``` INITIAL GRANT GUIDELINES — STARTUP (PRE-IPO) ============================================== Level Title Examples Options (shares) % of Fully Diluted ────────────────────────────────────────────────────────────────────────────── L3 Junior engineer 5,000–8,000 ~0.01% L4 Engineer 8,000–15,000 ~0.02% L5 Senior engineer 15,000–25,000 ~0.04% L6 Staff/Principal 25,000–50,000 ~0.07% L7 Engineering Manager 30,000–60,000 ~0.08% L8 Director 50,000–100,000 ~0.12% L9 VP 100,000–250,000 ~0.25% L10 C-suite 250,000–1,000,000 ~0.50%+ Notes: - Adjust for funding stage: earlier stage = higher grants (more risk) - Adjust for market: hot talent market = upper end of range - All grants subject to board/comp committee approval - Vesting: 4-year standard, 1-year cliff, monthly thereafter - Refresh grants: annual cycle, typically 25–50% of initial grant at same level INITIAL GRANT GUIDELINES — PUBLIC COMPANY ========================================== Level Title Examples RSU Value ($ grant date) ────────────────────────────────────────────────────────────────────────────── L3 Entry $20,000–$40,000 L4 Individual contributor $40,000–$80,000 L5 Senior IC $80,000–$150,000 L6 Principal $150,000–$300,000 L7 Manager $200,000–$400,000 L8 Director $400,000–$800,000 L9 VP $800,000–$2,000,000 L10 C-suite $2,000,000–$10,000,000+ Notes: - Public companies often split into annual tranches (25% of total per year, each tranche vests over 3–4 years) - Performance-based grants for executives (tied to stock price, revenue, or EPS targets) - Clawback provisions for executives (Dodd-Frank compliance) ``` ## Vesting Administration ``` VESTING SCHEDULE MANAGEMENT ============================= Standard vesting schedule (4-year, 1-year cliff): Month 0–11: 0% vested (cliff period) Month 12: 25% vested (cliff vests) Month 13–47: ~2.083% per month (remaining 75% over 36 months) Month 48: 100% vested Vesting event processing: 1. System auto-calculates vesting date and share count 2. Notification sent to employee 5 business days before vesting 3. Employee confirms tax withholding election 4. Vesting processed on scheduled date 5. Confirmation and updated statement sent to employee 6. Tax withholding executed (sell-to-cover for RSUs, cash for options) Accelerated vesting triggers: - Change of control (IPO, acquisition): single-trigger or double-trigger Single-trigger: vests immediately upon change of control Double-trigger: vests only if change of control + termination within X months Recommendation: double-trigger for most employees; single-trigger for executives - Death or disability: typically 100% acceleration (check plan documents) - Retirement: pro-rata acceleration for employees meeting age + service requirements Early exercise (options only): - Allows employee to exercise unvested options before they vest - Benefits: starts holding period for long-term capital gains, preserves ISO status - Risks: employee pays money for shares that may never vest; tax implications - Requires: board approval, tax counsel review, clear employee education ``` ## Annual Equity Refresh ``` EQUITY REFRESH CYCLE ===================== Timing: Annual (typically aligned with performance review cycle, Q1 or Q4) Purpose: Retain top talent, reward performance, replenish equity as options expire Eligibility: - All equity-holding employees in good standing - New hires in current year: typically not eligible for first refresh - Employees on PIP: excluded or deprioritized Refresh sizing framework: Performance tier Refresh as % of initial grant Example (L5, 20,000 initial) ───────────────────────────────────────────────────────────────────────────── Top performer 40–60% 8,000–12,000 shares Above average 25–40% 5,000–8,000 shares Meets expectations 15–25% 3,000–5,000 shares Developing 0–15% 0–3,000 shares Underperforming 0% 0 shares Process: 1. HR generates refresh candidate list with current holdings and performance data 2. Managers submit refresh recommendations (within guidelines) 3. HR reviews for equity (compare across departments, levels, demographics) 4. Calibration session: leadership reviews recommendations, adjusts for fairness 5. Final approval: CHRO + CEO (or comp committee for public company) 6. Communication: individual letters (confidential — equity is personal) 7. Grant processed and documented Communication template: "Congratulations. Based on your strong performance this year and your continued contributions to [Company], you've been granted [X] additional [options/RSUs]. These will vest over [period] per the attached schedule. Your total equity holdings are now [Y] shares. Details in your statement." ``` ## Equity Education ``` EQUITY EDUCATION PROGRAM ========================= New hire equity orientation (mandatory within first 2 weeks): - What equity is and why we offer it - Explanation of employee's specific grant (type, count, vesting, value estimate) - Tax basics: AMT for ISOs, ordinary income for RSUs, withholding - Exercise basics: what happens at termination, exercise windows - Resources: equity platform access, FAQ document, contact for questions Ongoing education: - Quarterly equity updates (company valuation for private, stock price context for public) - Annual tax planning session (before year-end exercise decisions) - Pre-IPO education (if applicable): lock-up periods, liquidity expectations - Refresher training for employees with 2+ years (exercise strategies, diversification) Key messages for employees: - Equity is a team sport: everyone benefits from collective success - Don't put all your wealth in company stock: diversification guidance - Tax implications vary: consult personal tax advisor for individual decisions - Equity value ≠ cash value (especially for private companies) - Vesting is earned over time: staying and contributing builds real wealth HR/Legal disclaimers: - All equity education is general information, not financial or tax advice - Company does not provide individualized financial planning - Employees encouraged to consult personal financial advisors ``` ## Lifecycle Event Handling ``` EQUITY LIFECYCLE EVENTS ========================= Promotion: - New grant at higher level (difference between current level grant and new level grant) - Existing grant continues on original vesting schedule - Communicate separately from base salary increase Termination (voluntary): - Unvested equity forfeited immediately - Vested options: 90-day exercise window (standard) or per plan document - Vested RSUs: already delivered; employee retains shares - Exercise assistance: provide valuation info, tax estimate, deadline reminder Termination (involuntary, not for cause): - Same as voluntary, but may include accelerated vesting per severance agreement - Negotiated acceleration: 3–12 months of unvested equity as part of severance Garden leave / non-compete: - Equity may continue vesting during garden leave period - Or: acceleration of vesting in exchange for non-compete compliance - Legal review required for enforceability IPO event: - All employees briefed on: lock-up period (typically 180 days), liquidity expectations, tax planning, insider trading restrictions - Updated equity statements with current market value - Dedicated Q&A sessions with equity platform provider Acquisition event: - Determine treatment of existing equity: cash-out, conversion to acquirer equity, or continuation - Communicate clearly and quickly to all equity holders - Legal + financial advisor support for complex conversions ``` ## Edge Cases - **Underwater options** (strike price > current valuation): communicate transparently; consider repricing (requires shareholder approval); supplement with RSU grants for retention - **409A compliance**: annual 409A valuation required for private companies; if valuation drops, existing grants may trigger unexpected tax events — proactively communicate - **Global equity**: different countries have different tax treatment of equity; use physical shares, phantom stock, or SARs depending on local law; consider tax gross-up for key international hires - **Option expiration**: options typically expire 10 years from grant; remind employees 1 year before expiration; process exercise or document forfeiture - **Divestment requirements**: some employees (board members, officers) must divest company stock to meet threshold requirements; provide support and timeline guidance