The Holloway Reader youβre using now is designed to help you find and navigate the material you need. Use the search box. It will reveal definitions, section-by-section results, and content contained in the hundreds of resources weβve linked to throughout the Guide. Think of it as a mini library of the best content on equity compensation. We also provide mouseover (or short tap on mobile) for definitions of terms, related section suggestions, and external links while you read.
This Guide contains a lot of material. And itβs dense. Some readers may wish to read front to back, but you can also search or navigate directly to parts that are of interest to you, referring back to foundational topics as needed.
Equity compensation lies at the intersection of corporate law, taxation, and employee compensation, and so requires some basic understanding of all three. You might think compensation and taxation are separate topics, but they are so intertwined it would be misleading to explain one without the other. We cover material in logical order, so that if you do read the earlier sections first, later sections on the interactions of tax and compensation will be clearer.
We start with Equity Compensation Basics: What compensation and equity are, and why equity is used as compensation.
But before we get much further, we need to talk about what stock is, and how companies are formed. Fundamentals of Stock Corporations covers how companies organize their ownership, how stock is issued, public companies and private companies, and IPOs and liquidity (which determine when equity is worth cash).
While not everyone reading this works at an early stage company, those who do can benefit from understanding the role of equity in Startups and Growth. This is good context for anyone involved in a private company that has taken on venture capital.
How Equity is Granted is the core of this Guide. We describe the forms in which equity is most commonly granted, including restricted stock grants, stock options, and RSUs.
Now is where it gets messierβtaxes:
Tax Basics: A technical summary of how taxation works. Many of the headaches of equity compensation involve how it is taxed, including ordinary income tax, long-term capital gains tax, and the lesser-known but sometimes critical alternative minimum tax.
Taxes on Equity Compensation: How much tax you owe is greatly affected by the kind of equity you have (such as restricted stock awards, stock options, or RSUs), when you choose to pay (including 83(b) elections), and when you choose to exercise options.
After these technical concerns, we move on to how you can think about all this in practice. These sections focus on scenarios common to employees and candidates, but are also of likely interest to founders and hiring managers:
Plans and Scenarios: Whether you have equity now or will in the future, it is helpful to learn how to think about the value of equity and its tax burden. We also cover whether you can sell private stock.
Offers and Negotiations: Equity often comes up as youβre negotiating or debating whether to accept a job offer. Here we cover what to expect, what to ask, tips and pitfalls, and more.
Finally, we offer some additional resources:
Documents and Agreements: A bit more detail on the actual legal paperwork youβre likely to see as you negotiate and after youβve accepted an offer.
Further Reading: A curated list of what else you can read on the subject, including many papers, books, and articles that have informed this Guide.
CEOs, CFOs, COOs, or anyone who runs a company or team of significant size should be sure to talk to an equity compensation consultant or a specialist at a law firm to learn about equity compensation plans.
Founders looking for an introduction to the legalities of running a company may wish to check out Legal Concepts for Founders, from Clerky, in addition to talking to a lawyer. Founders should also lean on their investors for advice, as they may have additional experience.
Executive compensation at large or public companies is an even more nuanced topic, on both sides of the table. Hire an experienced lawyer or compensation consultant. There are extensive legal resources available on executive compensation.
This Guide does not replace professional advice.
Please read the full disclaimer and seek professional advice from a lawyer, tax professional, or other compensation expert before making significant decisions.
Does that make reading through these details a waste of time? Not at all. Important decisions rarely should or can be blindly delegated. This Guide complements but does not replace the advice you get from professionals. Working with the support of a professional can help you make better decisions when you have an understanding of the topic yourself and know what questions to ask.
Companies ranging from two-person startups to the Fortune 500 have found that granting partial ownership in a company is among the best methods to attract and retain exceptional talent. In the United States, partial ownership through stock options has been a key part of pay for executives and other employees since the 1950s.* As recently as 2014, 7.2% of all private sector employees (8.5 million people) and 13.1% of all employees of companies with stock held stock options, according to the National Center for Employee Ownership.* Many believe employee ownership has βpaidβfostered innovations in technology, especially in Silicon Valley, from the early days of Hewlett-Packard to recent examples like Facebook. Stock options helped the first 3,000 employees of Facebook enjoy roughly $23 billion at the time the company went public.*
βcontroversyβ Some controversy surrounds the use of equity compensation for high-paid executives. Public companies offer executives equity compensation in no small part because of a tax loophole. In 1993, President Bill Clinton attempted to limit executive pay with a new section* of the Internal Revenue Code. Unfortunately, the legislation backfired; a loophole made performance-based payβincluding stock optionsβfully tax deductible, thereby creating a dramatic incentive to pay executives through stock options.* From 1970β79, the average compensation for a CEO of one of the 50 largest firms in the United States was $1.2M, of which 11.2% was from stock options. By 2000β05, the same numbers had risen to $9.2M and 37%, respectively.*