Revealing The 9 Things You Need to Know About Equity Compensation (Part One)

Happy 5th of July! I trust you had an awesome time with family, friends and fireworks yesterday. Continue your celebration of America’s independence whether you’re working or chillaxin’ today.

Before we get into today’s article, note that you’ll have 3 bonuses at New Tech Seattle on Tuesday: 1) Mission Impossible:Fallout is giving out swag and raffling off movie premiere tickets, 2) Celest Cafe is providing tasty lasagna, and 3) Ink+Volt is giving every attendee a 2018 planner so you’ll have a second chance on hitting your 2018 goals!

The subject of equity compensation is an important issue for employers and employees alike, especially as companies seek more creative ways to attract employees in a hot job market. But do you really understand it?

New Tech Northwest is hosting a special workshop on equity compensation on July 24th, where you’ll learn the equity basics from the experts at Bader Martin and Summit Law Group.

We talked with Bader Martin, the Seattle-based CPA and business advisory firm, to give you this primer before the workshop. Since our attention spans are short, we’ll share four with you this week and the final five next week. Let’s see how much you do or don’t know about equity:

What is equity compensation?
Equity compensation refers to a non-cash method of paying an employee. Stock options are a well-known form of equity compensation. It is basically designed to incentivize and reward employees, but often comes with restrictions, including vesting schedules, rights-of-first-refusal and other constraints on the sale of the stock.

What is the typical strategy behind offering equity?
Equity offers a way to compensate employees that doesn’t drain cash from the business. And employees feel invested in the future success of the company. Startups may offer equity to entice and retain co-founders and initial key employees. Subsequently, companies provide equity to employees for similar reasons.

Equity compensation taps into the commonly held impression that, through ownership of stock options and other forms of equity, employees can get rich. Think Microsoft or Expedia, Tableau, Zulily, Starbucks and Redfin.

Google is known for having turned its masseuse into a very wealthy person. And consider the major unicorn in Seattle, Amazon. Its stock has increased in value by more than 13,000 percent.

What are the typical types of equity compensation that companies offer?
Typical forms of equity compensation include the following:

  • Incentive stock options (ISOs). An incentive stock option—also known as a qualified stock option—can only be granted to a company’s employees. It satisfies requirements established in the Internal Revenue Code and therefore may provide significant federal income tax benefits.
  • Nonqualified stock options (NSO). These do not satisfy Internal Revenue Code requirements, and therefore do not provide the same federal income tax benefits as an ISO.

  • Restricted stock units (RSUs). These are typically rights to receive stock according to a predetermined vesting schedule, which could stretch over several years. When the employee receives the stock, it is ordinary income subject to payroll taxes.What are some alternatives to equity?
    One significant alternative to equity compensation is the use of Stock Appreciation Rights (SARs).
    This is essentially an employee bonus, with an amount tied to the value of the company stock over a predetermined period of time. If the company performs well financially, the employee is rewarded without having to actually buy equity.Join us for our workshop to take a deeper dive on this. Space is limited to just 35 seats, so secure your ticket today. And bring your questions!
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