A stock grant occurs when a company issues shares of its stock in exchange for non-cash consideration, typically the performance of services. By compensating with stocks, the employer aims to motivate employees to stay at the company and keep them invested in its ongoing success.
How do stock grants work?
Stock grants act as a form of compensation for employees. In addition to (or instead of) traditional cash compensation, the employer gives workers corporate stock in their company. Giving stock grants is a way to show that the company is investing in its employees and trying to build a strong future together. Any company can give stock grants to employees, but this practice is prevalent with startups.
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Typically, stock grants come with some restrictions. It’s common for stock grants to vest over one or two years. This vesting period means that the employee will only receive those stocks if they stay with the company until that period of time is over. Employees who leave before their stocks vest will forfeit those stocks. Note that employers can only issue stock grants for past services.
It’s easy to confuse stock grants and options, but they differ fundamentally. A stock grant provides the recipient with value—the corporate stock. By contrast, stock options only offer employees the opportunity to purchase something of value. They can acquire the corporate stock at a set price, but the employees receiving stock options still have to pay for those stocks if they want them.
The idea behind both practices is to motivate your employees to work harder for your company. Employees who receive stock grants or options may be willing to put more effort into their work since they stand to gain from company stock price increases. For the employer, providing stock grants or options to employees offers the additional benefit of not requiring a cash outlay upfront.
Creating a stock grant agreement
Any company issuing employee stock grants must have stock grant agreements in place. This agreement outlines the details of the stock grants, such as the number of stocks granted and the vesting timeline. You can customize your company’s standard stock grant agreement with any terms or clauses vital to you. For example, you may include non-compete provisions in your agreement to prevent employees from moving to your competitors.
The employee receiving the stock agreement should read it carefully and decide whether to accept the stock grant. They should sign and return the stock grant agreement if they accept the terms.
Employees who receive stock grants may wonder, “Are stock grants taxed as income?” The answer is yes, you must pay income tax on your stock grants—but not necessarily when you receive them. If the employee’s stocks have a vesting period, they don’t owe income tax on the stock grants until those stocks vest. At that time, the employee must report the equivalent cash value of their stocks as income.
Issuing stock grants also has tax ramifications for the employer. Companies that issue stock grants to employees may be able to claim a corporate tax deduction. To claim the deduction, U.S. employers must report the value of the stock grants on IRS Form W-2 or Form 1099.
Offering stock grants to foreign employees
You can also include your foreign employees when compensating your team with stock grants. Generally, U.S. companies can issue stock grants to foreign workers. But first, be sure to check local laws and regulations for any restrictions. Keep in mind that tax laws vary significantly from place to place. What’s advantageous for your tax bill in one location may not be beneficial in another.
Disclaimer: This article and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.
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Stock grants are a form of compensation for employees in which an employer gives employees corporate stock in the company as part of an equity plan. Employers issue stock as equity compensation to employees in exchange for non-cash consideration, such as the performance of services.
A stock option is an agreement between an employer and employee that allows an employee to buy a fixed number of shares of company stock at a specific price, usually within a set period of time.
For example, if you begin to work at a startup, you might be given stock options for 12,000 shares of the startup's stock as part of your compensation. These options aren't given to you immediately; they vest over a designated period of time. Vesting means it becomes available to use.
A stock grant provides the recipient with value—the corporate stock.By contrast, stock options only offer employees the opportunity to purchase something of value. They can acquire the corporate stock at a set price, but the employees receiving stock options still have to pay for those stocks if they want them.
ESOs are a form of equity compensation granted by companies to their employees and executives. Like a regular call option, an ESO gives the holder the right to purchase the underlying asset—the company's stock—at a specified price for a finite period of time.
Restricted stock units (RSUs) are a form of employee compensation that grants shares of a company's stock to employees. They may be granted to employees as a reward for performance, length of service or some other reason, or simply as an incentive to remain with the company.
A stock option is one of the most common types of employee equity compensation. It is a contract that enables an employee to purchase a given number of shares of a company at a determined price referred to as the strike price and within a specified time-frame called the exercise window.
A stock option provides an employee with the opportunity to purchase a set number of shares of company stock at a certain price within a certain period of time. The price is called the “grant price” or “strike price.” This price is usually based on a discounted price of the stock at the time of hire.
Stock compensation is a way corporations use stock or stock options to reward employees in lieu of cash. Stock compensation is often subject to a vesting period before it can be collected and sold by an employee.
ESPPs let employees purchase stock, typically with a 5% to 15% discount, through a payroll election (Sec. 423). This operates like a 401(k). The employee makes an election, and the employer reduces the employee's net paycheck and purchases stock on the employee's behalf with the amount taken from the paycheck.
Restricted Stock Unit Grants: This is the most popular type of employee stock plan for many startups. Restricted stock units (RSUs) provide several of the features described above including a vesting period of how long the employee must work for the company to access a certain amount of stock options.
An example of this would be a company granting a new employee 50 shares of shock that are vested over a period of two years. This entails that the employee is going to gain this stock only once these two years of working at the company are completed.
However, RSUs are given for free and only have value after they have vested, differing from stock options. Both restricted stock and RSUs become taxable only when the vesting schedule has been completed. With restricted stock, the full amount of the vested stock has to be taxed as ordinary income in the vesting year.
A stock grant agreement is a form your company uses to grant you an equity award. Grant agreements can be in the form of printed certificates or letters or online documents.
It may sound complicated, but accepting your stock grant should be a no-brainer for anyone who's starting at a new company. It's low-risk and can provide measurable benefits down the road. To get started on the ins and outs of stock options, check out part 1 of our series Equity 101: Startup Employee Stock Options.
As with RSUs, stock grants typically vest after a period of time, or after certain performance measures are met. You're not liable for income tax until your stock grant vests, at which point you must report income equal to the value of the stock you received.
The price that you will pay for those options is set in the contract that you signed when you started. You may hear people refer to this price as the grant price, strike price or exercise price. No matter how well (or poorly) the company does, this price will not change.
Exercising a stock option means purchasing the issuer's common stock at the price set by the option (grant price), regardless of the stock's price at the time you exercise the option. See About Stock Options for more information. Choices when exercising options. Example of an Incentive Stock Option Exercise.
Introduction: My name is Lakeisha Bayer VM, I am a brainy, kind, enchanting, healthy, lovely, clean, witty person who loves writing and wants to share my knowledge and understanding with you.
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