ESOP EXCELLENCE

We’ve put together a glossary of some basic terms to get your started.

Employee Stock (or Share) Option Plan (“ESOP”)

This is a framework set up by a company for granting options and will include all the key rules for how, when, to whom and under what terms options can be granted. Note that even when we are using the term “ESOP”, in practice these plans will frequently include other forms of equity-based compensation, such as RSU’s or Restricted Shares (see below). An ESOP will generally be set up in such a way that the terms ensure compliance with relevant tax rules.

Equity-Based Compensation

This is a general term for all forms of compensation either in the form of equity (e.g. a stock option or restricted share) or based on equity (e.g. stock appreciation rights—a bonus based on how much a company’s stock price increased over a given period). Stock options, RSU’s, restricted shares and ESPP’s are all forms of equity-based compensation.

Equity Incentive Plans

This is just a more general term than ESOP; it means a framework for granting any sort of equity-based compensation.

ESPP (Employee Stock Purchase Plan)

This is a program which allows employees to buy shares in the company at a set percentage discount from the current market price as of a certain date. Employees who wish to participate will contribute over a set period of time via payroll deductions; on a set day the accumulated amounts are used to buy shares. ESPP’s are more common in public companies. This plan is voluntary and each employee who is entitled to participate in the plan needs to decide whether to join the plan and how much to contribute (subject to the Plan's limitations).

Exercise Price (or Strike Price)

Grants under an ESOP are generally the right to buy a share of a company. The exercise price is the price the beneficiary pays for each share.

Grant (of Options/Stock (or Share)/ RSU’s/ etc.)

This is the issuance of some form of equity-based compensation by a company to a recipient.

Grant Agreement

This is the formal written document which is drafted for each grant award and is signed by the company and the beneficiary. The agreement outlines the specific award terms (e.g. number of options, vesting period, exercise price, etc.) as well as any general rules and requirements relating to both the options and any resulting shares (e.g. all shares are subject to a proxy until an IPO, options are non-transferrable, etc.). The Grant Agreement is subject to the Plan.

Grant Date

This is the date of a grant award used for statutory and tax purposes. It’s the date of the Board Resolution or the official approval of a specific grant by another Company authority. In order for any Board approval to qualify as the grant date, the approval must (1) be unconditional and (2) it must include all of the key terms, such as the quantity and exercise price. Where one of the key terms is missing from an approval, the grant date will be deferred to the date that the key terms are completed.

Restricted Stock (or Shares)

A company may allow an employee to purchase stock immediately (as opposed to in the future, as with options) or they may simply make a grant of shares for no cost. In this case, the recipient immediately becomes a shareholder of the company. However, these grants will often be made subject to a restriction, such as requiring the employee to work a certain amount of time after the grant. If the requirement isn’t met, the stock may be subject to forfeit (that is, the company takes the stock back) in whole or in part. As the requirement is fulfilled, the restrictions will be removed. This can happen all at once or ratably over time, based on the nature of the restriction.

RSU’s (Restricted Stock Units)

RSU’s are similar to Restricted Stock insofar as stock is being issued; the key difference is that initially the recipient receives a “right” to receive a share and not an actual one. As the relevant restrictions are fulfilled, actual shares (without restrictions) are issued.

Section 102

Section 102 is the section in the Israel Tax Ordinance which covers the granting of options to employees and company officers. Section 102 provides general guidelines for how to issue tax advantaged shares under a preferred tax route. For more information on tax advantaged shares and preferred tax routes, see the Questions and Answers section.

Stock (or Share) Option

Often referred to simply as an “option”, this gives the recipient the right, but not the obligation, to purchase a share of a company for a given price (called the “exercise price”) and at some future date. Options are most frequently issued to employees, directors, advisors and suppliers. The concept behind them is that if the company does well, the value of a share will increase to be higher than the exercise price ('in the money') and the recipient will ultimately be able to buy the share at a discounted exercise price.

Vesting

Vesting is the process of earning the rights to something. In the case of equity-based compensation, grants tend to vest (are earned) over a set amount of time called the vesting period. The rate at which the vesting happens is called the vesting schedule. While vesting can happen all at once (e.g. all options vest after one year,etc.) it’s more common to see vesting happen ratably over a time period (e.g. in 16 equal quarterly installments over four years) but there are also performance- based vesting options.