ESOP vocabulary

Published on
September 13, 2023


ESOP might sound complicated, but it doesn't have to be. We've created a list of the most commonly used ESOP terms and broken them down into simple language that's easy for anyone to understand. Let's get started!

Accelerated vesting

Companies can speed up vesting to allow employees to get the full benefit of their grant sooner. Accelerated vesting can either shorten the vesting period or skip it altogether.

Award

An award is when a company gives equity to its employees. It specifies vesting parameters, the number of shares and other conditions.

Bad leaver

A bad leaver is an employee who seriously breaches their obligations to the company (e.g. fraud or a breach of NDA). Bad leavers typically lose their ESOP rights (vested and unvested) or are otherwise sanctioned.

Bonus swap

Bonus swap, also known as one-off swap, allows employees to swap their salary increase for equity. Typically, it includes 1-year vesting without cliff. The vesting is monthly and linear, so each month 1/12 of the award vests.

Buyback

A buyback occurs when a company repurchases equity from an employee. This typically happens when an employee leaves as a Good Leaver or when the company wants to provide liquidity before an exit event.

Cap table

A cap table is a list that summarizes company ownership (who owns how much and at what valuation). It also keeps track of the company's valuation.

Cliff

A cliff is a non-vesting period that occurs after equity has been granted. The most common rule is 4-year vesting with 1-year cliff, which means that the employee will own 100% of the granted shares after 4 years. The first year is a cliff period when nothing vests and after that are 3 more years of vesting period.

Company valuation

Company valuation is used to calculate the price per asset and visualize the value of an employee's portfolio.

Depository receipts

A depository receipt is a type of asset that give their owners the financial rights of a shareholder without the decision-making powers. Depository receipts are a common type of asset given in the STAK plan.

Dilution

Dilution happens when a company issues new shares. This often happens in connection with investment rounds. As a result, existing shareholders' ownership percentage goes down.

Dividends

Dividends are distributions of profits made by a corporation to its shareholders.

Eligibility

Eligibility refers to the criteria that employees must meet to participate in an ESOP, usually based on employment length. It typically starts after the probation period.

Enterprise Management Incentives (EMIs)

The Enterprise Management Incentive (EMI) is a government-backed share option scheme. The EMI plan allows UK businesses to offer stock options to their team in a way that’s tax-efficient for both the employees and the company. The goal of the plan is to help startups recruit and retain talent effectively.

Equity

Equity represents ownership in a company, providing potential growth and risk of loss if the company's value fluctuates.

ESOP

An ESOP (Employee Stock Ownership Plan) is an employee benefit plan that allocates shares to employees, allowing them to own a part of the company.

ESOP allocation

ESOP allocation is the distribution of equity in the ESOP pool among individual employees. It specifies how much will each employee receive.

ESOP plan

An ESOP plan is a legal document that outlines the parameters of an employee equity program.

ESOP pool

The ESOP pool is the portion of company equity set aside for employee ownership. Its size is usually between 10-30 % but it depends on the company stage.

Exercise

To exercise a stock option means to buy the company's shares at a pre-defined price (exercise price or strike price).

Exercise window

The exercise window is the timeframe during which an employee can purchase shares. It typically starts from the date of departure from a company and lasts for a predetermined number of days.

Exercise price

The exercise price, also known as the strike price or option price, is the fixed price at which an employee can buy the company's shares.

Exit

An exit refers to the event in which a company is sold, goes public, or is otherwise liquidated. An exit provides liquidity for shareholders through the sale of equity for cash.

Fair market value (FMV)

Fair market value is the valuation of a company's stock.

Good leaver

A good leaver is an employee who leaves the company under good terms, such as contract termination or mutual agreement. Good leavers usually keep their ESOP rights or are given fair treatment upon exit.

Grant size

The grant size refers to the number of shares offered to a specific employee in an award.

Initial public offering (IPO)

In an IPO, a private company lists its shares on a stock exchange. This way, it makes them available for purchase by the general public.

Initial value

Initial value means the Fair Market Value of phantom shares at grant. It's used in the calculation of the bonus payable to the employee typically on exit.

Milestone-based vesting

Milestone-based vesting means that employees earn their equity grant when specific milestones or criteria are met.

Pause vesting

Pause vesting occurs when the vesting period is temporarily suspended. This means that equity doesn't vest during this period. This is commonly done when an employee takes more than one month of unpaid time off.

Phantom plan

A phantom plan, also known as a virtual plan, is a type of ESOP that gives employees a share in the company’s success without actual stock ownership. Instead, the employees get phantom shares which entitle them to a cash bonus payable typically on exit. The value of phantom shares mirrors the value of actual shares. When the company valuation increases, the value of phantom shares grows as well.

Phantom shares

Phantom shares are not actual shares. They give their owners a conditional right to receive a cash bonus based on the value of real shares allocated to the ESOP pool.

Restricted Stock Units (RSUs)

An RSU is an award of a company's shares, typically used via the US stock option plan. RSUs give employees interest in the company's equity but have no tangible value until they’re vested.

Reverse vesting

Reverse vesting allows a company to buy back equity from employees for current Fair Market Value. It ensures that employees get the full benefit of the grant only once the vesting period lapses.

Salary swap

Salary swap, also known as advance swap, allows employees to swap their cash bonus for equity. Typically, it vests immediately.

STAK plan

The STAK plan is a tax-efficient type of ESOP commonly used by Dutch companies. STAK (Stichting administratiekantoor plan) is a trust set up by the company to allow employees to own the so-called depository receipts (DRs). Put simply, DR-holders have the financial rights of a shareholder without the decision-making powers.

Standalone award

Standalone award is given to employees on top of salary or bonus. Typically it comes with 4-year vesting with a 1-year cliff.

Stock options

A stock option is a type of asset that gives employees the right, but not the obligation, to buy the company's shares at a fixed price.

Swap awards

Swap awards allow employees to exchange a part of their salary component (typically a salary increase or a bonus) for equity.

Time-based vesting

Time-based vesting means that employees earn their equity grant over time, without any additional criteria like KPIs or milestones.

US stock options plan

The US stock options plan is a tax-efficient share option scheme used primarily by companies headquartered in the US. This plan typically gives companies the option to grant the so-called RSUs (Restricted Stock Units). RSUs give employees interest in the company's equity but have no tangible value until they’re vested.

Vesting

Vesting is the process by which an employee's award becomes fully owned by the employee. Vesting can be either time-based (based on the lapse of time alone) or milestone-based.

Vesting period

A vesting period is the period over which an award becomes vested. A vesting period is defined by the ESOP plan or award.

Vesting schedule

A vesting schedule is a timeline over which an employee’s award becomes vested. A vesting schedule can be monthly, quarterly or annual. It can also have linear schedule or progressive (back-loaded) schedule.

Content

Accelerated vesting

Award

Bad leaver

Buyback

Cap table

Cliff

Company valuation

Depository receipts

Dilution

Dividends

Eligibility

Enterprise Management Incentives (EMIs)

Equity

ESOP

ESOP plan

ESOP pool

Exercise

Exercise window

Exercise price

Exit

Fair market value (FMV)

Fully diluted equity

Grant size

Initial public offering (IPO)

Initial value

Milestone-based vesting

Pause vesting

Phantom shares

Restricted Stock Units (RSUs)

Reverse vesting

Stock options

Swap awards

Time-based vesting

Vesting

Vesting period

Vesting schedule

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