Glossary of Terms
Accelerated vesting - This provision, if included in the plan, allows the acceleration of the vesting period. This acceleration will occur only when certain conditions outlined in the plan are met. E.g. The company is acquired prior to the shares fully vesting.
Allotment date – The date of allotment is the date on which the shares are allotted to an employee/director i.e. the date the virtual shares are deemed to be allotted.
Authorized shares – the total number of shares a company is legally allowed to issue.
Cliff vesting - In this type of vesting, the employee gains no right to his grant until he has stayed with the company for the full specified period at which time the options become 100% vested.
Common Stock/Shares – also known as ordinary shares/voting shares. A common share is a security that represents an ownership stake in a company. A holder of common stock also has voting rights. A common shareholder may or may not receive a dividend in any given year, depending on how profitable the company is. They are last in line in the event of a company liquidation.
Convertible Notes – also known as convertible debt – are a common form of security for pre-seed- and seed-stage financing. A convertible note is debt that converts to equity when the company completes an equity financing transaction. They pay interest on a principal amount, specify a discount at which they convert to equity and commonly specify a cap at which they can convert to equity.
Early exercise - The early exercise program permits exercise of stock options immediately after grant rather than waiting for any vesting period. However the stock issued on exercise is restricted and is subject to a vesting schedule.
Equity award/Compensation – refers to an award of stock options, RSA’s, RSUs, phantom stock granted by the company to its employees. It is a method of rewarding employees.
ESOPs - In India ESOPs generally mean Employee Stock Option Plans. In the USA, ESOP stands for Employee Stock Ownership Plan and it refers to the Ownership of a business by its employees.
Exercise - Is the act of an employee using their right to purchase shares in a Company, subject to details outlined in the option plan. The shares are issued upon payment of the Exercise Price. The exercise can only take place as specified after Vesting.
Exercise period - The period from the date the options vest until the date the options can be exercised. On the expiry of the Exercise Period, any Options that have not been exercised will lapse and cease to be valid for any purpose.
Exercise price - The amount to be paid by an Optionee at the time of Exercising their options. This price is determined at the time of grant and remains constant over the term of the option.
Expiration Date of Options - It is a predetermined date at which time you must make the decision on whether or not you will exercise your Options. If you do not exercise your options before the expiration date, they expire/lapse and cannot be exercised after that day. Options will vest at different stages, entitling the user to exercise their right to buy. However, they have up until the expiration date to actually buy or exercise the option which might be well out into the future, up to 10 years.
Graded vesting - In this type of vesting, a portion of the options granted to the employee will vest each year or predetermined period that they stay with the company following the grant.
Grant - Grant means an issue of options/restricted stock to employees under an ESOP.
Grant date - The date of grant is the date at which the employee/director is granted the right to acquire shares in the future. This is a right which the employee may or may not choose to take up in the future.
Issuance – refers to the issue of common or preference shares as above
Issue – the authorization and delivery of common or preference shares/stock sold to shareholders, whether insiders or individual or institutional investors.
Issue date – the date you issue common or preference shares to a shareholder
Issue price – the price at which you issue common or preference shares to a shareholder
Issued shares – a total of all shares issued by the company to date.
Market Price - the price of a share on any given date. It is the closing price of a share on that date, on the stock exchange in which the shares of the company is listed. A private company, in contrast, is not listed and therefore must undergo some method of valuation to determine its current market price.
Options – It is an option means a stock option granted pursuant to a Plan, giving an employee the right but not the obligation, to buy a specified number of shares in the Company at a specified price and date in the future.
Option repricing - Repricing of stock options means changing the existing exercise price of the option to a different price. The company generally does this when the stock price has dropped due to market conditions and hence the stock price is lower than the exercise price.
Option term- the length of time the employee can hold the option (unvested or vested) before it expires.
Par value – Nominal value/face value - Value of a single common share and expressed in the articles of incorporation. It has little relevance to the actual/market value of a share which is usually much higher. Initially set very low, allowing founders to acquire a large proportion of company at little or no cost.
Performance based vesting - A vesting schedule in which the vesting of options is tied to the achievement of certain performance goals. e.g. achieve a certain sales target, linked to the overall performance of the company.
Preference Stock/Shares – also security that represents ownership in a company however, unlike common stock, there are no voting rights attached to preference stock. Preference stock usually pays the owner an agreed upon dividend at regular intervals. Preference stock has seniority over common stock when it comes to paying dividends and in the event of a liquidation.
Purchase Plan- It is a program in which employees can purchase shares with discount.
Release- Once the restriction lapse, the shares are released to the employee.
Release methods- Sell all, sell to cover, hold all.
Restricted Stock- Direct grants of stock to employees, that get it for free.
Restricted Stock - Stock issued to employees with the agreement that they will own the stock only if certain goals are achieved.
RSAs - A Restricted Stock Award is similar to an RSU, however you receive the shares on grant date. As you are the owner of the stock on this date, you may also be eligible for dividends. They are generally granted at no cost or nominal/par value, before a funding round has occurred. As you are the legal owner on grant date, a vesting schedule impacts whether the company can purchase the shares back should you leave before the shares have become fully vested or met other predetermined conditions. Thus, the name forfeitable shares can also be applied to RSA’s.
RSUs – A Restricted Stock Unit is a conditional award to give stock on a future date, contingent on a certain vesting schedule and/or performance criteria being met. The stock is not owned on grant date and will be received by the employee on the vesting date or at a liquidation event in the future. Nearly always issued at 0 cost.
Shares/Stock – units of ownership in a company. A share entitles the owner to a distribution of any profits.
Shareholders – any person or entity who holds an outstanding security in a company – stock, option grants, equity plan award, warrant or convertible note.
Share Class – a class of shares is a type of stock differentiated by the level of voting rights the shareholders receive. A company may have a number of different common share classes and a number of different preference share classes.
Share Insurance- Issued shares are the authorized shares sold to and held by the shareholders of a company.
Share repurchase – refers to the repurchasing of shares already issued by a company aka. A buyback. A company can repurchase shares from either existing shareholders including investors and employees.
Spread- Difference between exercise price and the Fair Market Value (FMV) at time of exercise.
Stock Option plan/Equity incentive plan - A document outlining the rules under which stock options are granted or under which restricted stock is granted. It indicates the type of award, who is eligible etc.
Time based vesting - A vesting schedule in which the vesting of options is tied to: length of service requirements. E.g. An employee must remain with the company for a number of years before they receive the right to exercise their options.
Vesting - Vesting means the process by which the employee gains full rights to the options granted to him in pursuance of ESOP. Vesting can be either time based or performance based.
Vesting period - The period during which the vesting of the option granted to the employee takes place.
Vesting schedule - The vesting schedule gives the details of the vesting of options granted under the ESOP Plan. It details the vesting period and the percentage of the total options granted that can be exercised after the completion of the vesting period.
Vesting start date- The Vesting start date is the date from which the vesting schedule commences i.e. the date the shares begin vesting. This can be the same date as the grant date or a date that precedes or comes after the grant date.
Warrants - Warrants are similar to stock options. They have an expiration date and strike(grant) price like options, and can be exercised for shares of stock. However, they are usually issued as part of investment transactions and typically not subject to vesting. Additionally, warrants are often exercisable for preferred stock, while options are almost always exercisable for common stock.