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Whether you're an investor, a burgeoning startup founder, or an employee deciding between job offers, grasping these concepts could lead to wiser decisions—and potentially, richer rewards.
Stock Options
Exploring Traditional Stock Options
Traditional stock options have long been a part of the reward packages offered by established companies aiming to lure and retain top talent. That form equity compensation give employees the right to purchase company stock at a predetermined price, known as the exercise or strike price, after a certain period, known as the vesting period, if an exit occurs (most of the time).
Your journey to better, clearer international equity practices starts here
Use Cases Where Traditional Stock Options Shine
Employers and employees both stand to gain from traditional stock options. For companies, they're a tool for motivation, directly tying an employee's financial gain to the company's success. For employees, there's the tantalizing prospect of significant financial rewards should the company's stock price soar.
A classic example of this sort of stock option in action is when you see a tech giant like Google granting its early employees stock options. Those who hung on their options and exercised them after the company's exponential growth reaped substantial profits.
SARs or Virtual Stock Options
Deciphering SARs
Stock Appreciation Rights are a bit like the cryptocurrency of the equity compensation world—digital and a tad complex. They offer holders the future cash payment or shares equivalent to the increase in stock price over a set period, all without the need to actually own stock initially.
For example, if an employee is granted SARs when the stock price is $10, and over a set period the stock price rises to $20, the employee benefits from the $10 increase per SAR. Depending on the terms, they could receive this amount in cash or in shares, adding significant value to their compensation package without the initial investment of buying the stock.
Preferred Scenarios for SARs
Startups might be keen on SARs. They're cleaner (no shares actually change hands during the earliest stages of the startup), they don't dilute ownership, and they offer similar motivational perks to normal options. Plus, there are no upfront costs for employees, as opposed to purchasing the stock outright at the strike price.
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The Detail is in the Differences
When we examine the details, SARs and traditional stock options are significantly different, not even closely related. Here's why:
- Tax Implications: SARs are often taxed as ordinary income at the time of exercise AND sale, unlike traditional stock options which are in some countries taxed at sale only or in most countries as capital gain at sale (i.e. sometimes less taxed than income tax).
- Cost to Employees: Traditional stock options often require employees to put down money to buy the stock, whereas SARs do not (unless the company wants to mimic traditional stock option).
Why Opt for SARs?
In countries where putting in place traditional stock options is burdensome or the tax regime not advantageous, SARs provide a simpler route to equity compensation without the need to handle actual shares initially. Companies facing regulatory complexities may find SARs an appealing alternative.
Considerations for Companies and Employees
What's increasingly apparent is that there isn't a one-size-fits-all answer. For companies, the choice between SARs and traditional stock options involves balancing financial strategy, employee satisfaction, and long-term goals. Employees, meanwhile, should consider their personal tax situations, investment strategies, and the potential growth trajectory of their company.
Your journey to better, clearer international equity practices starts here
