Offering employees stock, other equity, or stock options can create a powerful incentive for good employees to stay with the company and to truly invest in its success. When an employee knows that he or she will benefit directly if the company thrives, and feels valued and included in the growth and development of the company, morale and personal investment often soar. Depending on the nature of the stock plans, it may also have significant tax benefits for the company.
Employee Stock Plans
However, selecting the right type of employee stock or equity plan for your company and ensuring that it is administered effectively and in compliance with legal requirements can be complicated. A business lawyer with experience in the selection and structuring of employee stock or equity plans can work with your company’s leadership and financial management to identify and implement the right program for you and your employees.
Types of Employee Stock, Option and Equity Plans
There are a variety of possible structures for employee stock and equity plans, and the details and distinctions are not always clearly understood. However, attempting to choose, create and administer a plan without a complete understanding of the law can lead to costly errors and possible violations of the law. Working with an experienced employee benefits attorney to determine the best plan for your company and obtain guidance in the adoption and management of the plan protects your interests and those of your employees.
Some most common possibilities include:
Employee Stock Ownership Plans (ESOPs): An ESOP is not a stock option plan, but rather a direct employee stock ownership program paid for by the company. Shares granted to employees are typically purchased by the company from one or more existing owners, or the purchase is funded by the plan taking out a loan, which is then repaid by the company. With an ESOP plan, the stock ownership itself is an employee benefit.
Stock Options: A stock option plan does not directly grant stock to employees, but rather allows them to purchase a certain amount of stock at a particular price. Typically, this option vests only after a set period of employment. If the stock price rises significantly above the option price, it is profitable for the employee to purchase the stock. He or she can then resell the stock and reap the short-term profits or hold the stock as an investment.
Employee Stock Purchase Plans (ESPPs): ESPPs are similar to stock option plans, except that employees are offered the opportunity to purchase stock during a specific period. The price is typically discounted by a set percentage, and the time period during which employees have the option to purchase is limited.
Stock Awards: Stock may be awarded directly to employees as bonuses, upon reaching a particular milestone such as a set number of years of service, or upon achievement of a performance goal. Unlike tax-qualified plans such as ESOPs, stock awards may typically be made to specific employees or limited classes of employees at the employer’s discretion.
Phantom Stock: A phantom stock plan pays out to employees at a future date based on a percentage of equity. The payout may come in the form of cash upon a particular event, such as the sale of the company, or may be fulfilled in stock.
Of course, each of these and other types of employee stock or equity plans carries with it particular legal and structural requirements. Those involving stock are subject to Securities and Exchange Commission (SEC) regulations and reporting requirements.
However, federal law does not govern every issue with respect to employee stock plans. Any dispute arising between the company and one or more employees with regard to the stock plan will typically be governed by state, not federal law. Understanding the complicated web of interconnected legal requirements can be difficult for a non-attorney, or even an attorney without direct experience in this arena. An employee benefits attorney who is experienced in all aspects of employee stock and equity plans can explain in detail which state and federal laws and regulations will impact the establishment and operation of your chosen plan and guide you in complying with those requirements.
Talk to an Experienced Employee Benefits Attorney
Whether you are just beginning to consider establishing an employee stock or equity plan and do not yet know which type of plan will best suit your company or know what type of plan you would like to implement but need guidance in legally and effectively launching your plan, our experienced employee benefits attorneys can help.