Congratulations! You just received word that your employer has decided to offer you equity compensation, in the form of company stock, as part of your overall compensation package. While equity compensation is a great way to boost your savings to help you achieve your goals and objectives, it requires special attention. There are several types of equity compensation that you can receive, and each type comes with its own set of terms and income tax characteristics. Therefore, if you receive (or already have received) equity compensation, now is the time to familiarize yourself with your specific grant(s) terms and conditions. Equity compensation awards do not come with an instruction manual. Companies typically do not have equity compensation specialists on staff to provide personal financial advice or guidance on how you should handle your grant. While they can guide you through the process and mechanics, they are not in the position to make personal financial planning recommendations. Here are 3 Things to Know When You Receive Equity Compensation.
Impact On Your Financial Situation
Your company will provide a copy of the plan document with your grant agreement these documents provide important, useful information but are typically filled with tax calculations and other technical jargon, which may confuse some. The plan document describes the plan’s overall structure and contains specific terms and conditions, including what kinds of awards can be granted and who will be eligible to receive them. Plan documents are often customized to the issuer’s unique situation; therefore, if you have received equity compensation from a previous employer, do not assume that your current employer’s plan will operate in the same fashion. On the other hand, the grant agreement will specify the details for your individual grant. This will include the name of the grant recipient, the effective date of the grant, type of award, number of shares of stock covered, exercise price, vesting schedule, and the award’s expiration date.
To determine how the equity grant impacts your financial situation, you will need to look no further than the grant agreement. This is where you will find most of the pertinent information you need. The three items you want to make sure you understand are:
- Type of award you received
- Grant Date
- Vest Date
Type of Award
Equity compensation comes in many forms however the most common types include restricted stock awards, restricted stock units, incentive stock options, non-qualified stock options, and employee stock purchase plans. Each of these types of plants operates in a different fashion and each has its own tax characteristics. Therefore, for you to determine how your grant impacts your financial situation you will first need to understand what type of grant you received. If you are interested in learning more about these plans and their different tax characteristics, please see our previous blog posts on the subject (Equity Compensation Series – Part 1 Restricted Stock Awards (RSA) and Restricted Stock Units, Equity Compensation Series – Part 2 Employer Stock Options, and Equity Compensation Series – Part 3 Employee Stock Purchase Plans.)
Grant Date
The grant date is the date in which the award is approved by your company’s board of directors and granted to you. It is important to note that even though you have received a restricted stock or stock option grant you will most likely not own the underlying shares or options as of the grant date. Instead, you will receive ownership in the shares and/or options over the course of time (1-year, 3-years, 5-years, etc.) as you maintain employment with the company. This process is referred to as vesting.
Vest Date
The vesting date is the date on which you take ownership of all or a portion of your award. As mentioned above, equity grants are typically subject to a vesting schedule. This means that you receive ownership of all or a portion of the shares of stock or options over a period of time, as long as you stay employed with the company. Let’s say that your employer granted you 200 shares of stock, subject to a vesting period of 1 year. This means that after 1 year of service, assuming you are still employed by the company, you will take ownership of the 200 shares.
Contact Zynergy Retirement Planning Today
Equity compensation has become more and more popular over the years, and if you find yourself in the fortunate position where your company is providing you with equity compensation, then you will want to make sure you know the type of equity you received along with the grant date and vest date. In addition, I would strongly suggest you reach out to your financial planner so that you can get a comprehensive look at how your equity compensation can help achieve your goals and objectives.
