Alternatives for Equity Incentive Programs

May 2009

Following is a general summary of common equity incentives offered by companies to compensate management and/or consultants.  While we have referred to “stock” in this alert, these alternatives should be similarly available for non-corporate entities, except incentive stock options which may be issued only by corporations and only to employees.

I.                   Stock Options

Gives the worker an opportunity, once the option vests, to elect to purchase company stock at a price equal to the stock’s fair market value at date of grant.  Tax consequences depend on whether the option is statutory (also known as incentive stock options) (ISO) or nonstatutory (NSO).

A.                Advantages

Company:

B.                Disadvantages

II.                Restricted Stock

Gives the worker an immediate ownership interest in the company, subject to certain forfeiture or transferability restrictions for a specified period of time or until certain performance targets are met, or both (known as the restriction or vesting period).  Usually issued at nominal or no cost, or in return for a promissory note.

A.                Advantages

Company

B.                Disadvantages

III.            Stock Appreciation Rights/Phantom Stock

Both phantom stock and stock appreciation rights (SARs) provide the worker a future cash or stock payment based on the value or increase in value of a set number of shares over a set period of time.  SARs generally provide the right to the increase in value of a specified number of shares when the worker chooses to exercise the SAR.  Phantom stock provides the right to the value of a specified number of shares upon a certain date that can not be controlled by the worker.

A.                Advantages

Company

B.                Disadvantages

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