Equity grants: Overview, definition, and example
What are equity grants?
Equity grants are awards given by a company to employees, executives, or other stakeholders, typically in the form of company stock or stock options. These grants give the recipient an ownership interest in the company, allowing them to share in the company’s growth and success. Equity grants are often used as a tool for employee compensation, motivation, and retention, aligning the interests of employees with those of the shareholders.
For example, a company might grant stock options to an employee that allow them to purchase shares of the company at a set price in the future, potentially benefiting if the company's stock price increases.
Why are equity grants important?
Equity grants are important because they provide an incentive for employees and stakeholders to work toward the company’s long-term success. Since the value of equity grants is tied to the performance of the company’s stock or ownership structure, they can motivate recipients to contribute to the company’s growth and profitability. Additionally, equity grants can be a valuable tool for attracting and retaining talented employees, especially in competitive industries.
For companies, offering equity grants helps align employees' interests with the company’s performance, encouraging hard work, innovation, and loyalty. For employees, equity grants provide the potential for financial rewards if the company performs well, giving them a stake in the company's future.
Understanding equity grants through an example
Imagine a tech startup that offers its employees stock options as part of their compensation package. An employee is granted the option to purchase 1,000 shares of the company at $10 per share, with the right to exercise the options after 3 years. If the company’s stock price increases to $30 per share in the future, the employee can exercise their options and purchase the stock at the lower price, making a profit from the difference.
In another example, a public company may offer restricted stock units (RSUs) to its executives, giving them a certain number of company shares that vest over time. The executives can sell the shares once they have vested, benefiting from the increase in the company’s stock value.
An example of an equity grants clause
Here’s how an equity grants clause might appear in a compensation agreement:
“As part of the Employee’s compensation package, the Company grants the Employee 2,000 stock options with an exercise price of $25 per share. These options will vest in equal installments over four years, beginning on the first anniversary of the grant date. The options may be exercised by the Employee at any time after vesting, subject to the terms of the Company’s equity incentive plan.”
Conclusion
Equity grants are an effective way for companies to offer compensation that aligns employees' interests with the company’s long-term goals. These grants can take various forms, such as stock options or restricted stock units, and can provide employees with financial rewards if the company performs well. For businesses, equity grants help attract, retain, and motivate talent, while employees benefit from having a direct stake in the company's success. Understanding how equity grants work is important for both employers and employees to make informed decisions about compensation and incentives.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.