The Stock Plan Administration Glossary (E-M)

E

Employee Stock Ownership Plan (ESOP): Not to be confused with stock options, an ESOP is a qualified retirement plan (like a defined contribution plan) that invests primarily in the employer’s stock. ESOPs allow employees to become shareholders over time, often at no upfront cost to the employees. Companies contribute either cash to buy shares, or contribute shares directly into a trust fund for employees. ESOPs are governed by ERISA and have special tax advantages: for example, they can borrow money to buy company stock (leveraged ESOP), and sellers in a private company ESOP can sometimes defer capital gains. The result is employees accumulate ownership, typically proportional to their pay or years of service. Upon leaving or retirement, employees receive the value of their ESOP shares (often the company or ESOP trust buys them back). In privately held firms, ESOPs provide a market for shares and can be used as an exit strategy for owners. In public companies, ESOPs are sometimes used as a broad-based ownership program or as a way to fend off takeovers by keeping shares in friendly hands     . (Note: ESOPs are a distinct concept from incentive equity plans like options/RSUs, but both give employees company stock.)

Employee Stock Purchase Plan (ESPP): A program that allows employees to purchase company stock, often at a discount, through payroll deductions. ESPPs accumulate after-tax contributions from employees over an offering period (commonly 6 months), then at the purchase date the employer uses the funds to buy shares for participants. A typical ESPP offers a 10–15% discount on the stock’s market price. Many plans also have a lookback provision – meaning the purchase price is based on the stock price at the start of the offering or the end, whichever is lower   . For instance, an ESPP might let employees buy at 85% of the lower of the price on Jan 1 or Jun 30. U.S. companies often structure ESPPs to qualify under IRC §423 (see Section 423 Plan): in such qualified plans, the discount is not taxable at purchase and, if the employee holds the shares long enough (≥2 years from offering, ≥1 year from purchase), any gain can qualify as capital gains (otherwise the discount portion is taxed as ordinary income). ESPPs are usually broad-based (offered to most or all employees). They encourage employee ownership and can be a valuable benefit, especially if the stock appreciates between the offering and purchase dates.

Equity (Shareholders’ Equity): In a corporate context, equity represents ownership in the company – the residual interest in the company’s assets after liabilities. In simpler terms, it’s the value that would be returned to shareholders if all assets were sold and debts paid. Equity compensation specifically means compensation provided in the form of company ownership, i.e. stock or rights to stock, rather than cash. Stock options, RSUs, stock grants, and ESPP shares are all equity compensation because they give the employee an ownership stake (or potential stake) in the business. In an accounting context, equity is the sum of share capital, additional paid-in capital, retained earnings, etc., on the balance sheet. But in everyday usage for stock plans, “equity” simply refers to stock or stock-based awards. Example: A startup might say “We can’t pay high salaries, but we’ll give you equity” – meaning stock options or similar, allowing the employee to benefit if the company’s value grows.

Equity Incentive Plan (Stock Plan): A company’s formal plan document that governs the granting of stock-based awards to employees, directors, and other service providers. This plan – often called the 20XX Stock Incentive Plan or similar – sets the total number of shares authorized for awards (the share reserve), the types of awards that can be granted (options, RSUs, etc.), eligibility, and various terms and conditions (like vesting, transferability, corporate transaction treatment, etc.). The plan must typically be approved by the Board and often by shareholders (especially for public companies, or to qualify ISOs). Individual grants are made under the plan and are subject to the plan’s rules. An equity plan usually also describes how it will be administered (by the Compensation Committee), what happens if shares run out, adjustment provisions for stock splits, and so on. In summary: the Equity Incentive Plan is the umbrella under which all individual equity awards are granted and managed.

Exercise (Stock Option Exercise): In the context of stock options, “exercise” means the act of purchasing the underlying stock at the option’s exercise price (also called strike price). When an option holder exercises their option, they pay the strike price to the company and in return receive the number of shares the option grants. For a Non-Qualified Stock Option (NSO), exercising triggers a taxable event on the spread (difference between FMV and strike). For an Incentive Stock Option (ISO), exercising itself typically isn’t a regular tax event (though it can incur AMT) – taxation depends on later sale. There are different ways to exercise: the individual can pay cash (a cash exercise) or do a cashless exercise (see that entry) where the option is exercised and immediately sold or netted for shares. Example: An employee has an option for 1,000 shares at $10 strike; the stock is now $30. They exercise all 1,000, paying $10,000 to the company, and receive 1,000 shares (worth $30,000). The method of exercise can vary, but the fundamental result is exchanging the option for actual stock ownership (and potentially realizing gain).     

Exercise Price (Strike Price): The fixed price per share that an option holder must pay to exercise the option and acquire the stock. The exercise price (or strike price) is set at grant time. For compensatory stock options, the strike price is typically the market price of the stock on the grant date (for ISOs and most NSOs in public companies, it must be at least FMV on grant to avoid 409A issues). For example, if an option is granted when the stock is $15, the exercise/strike is $15. That means no intrinsic value at grant – the option gains value only if the stock price rises above $15. The terms exercise price, strike price, and grant price are used interchangeably. Upon exercise, the total payment required is (exercise price) × (number of shares). In trading contexts, “strike price” applies to exchange-traded options; in employee stock options, “exercise price” is more common, but both refer to the same concept. If the market price stays below the strike, the option is “underwater” (not worthwhile to exercise). If the market price is above the strike, the option is “in the money” by that difference.

F

Fair Market Value (FMV): The price at which property (here, a share of stock) would change hands between a willing buyer and seller, both having reasonable knowledge of relevant facts and neither under pressure to transact. In stock compensation, FMV is critical for setting exercise prices and for tax calculations. Public companies generally use the market closing price as FMV on a given day. Private companies must determine FMV via a reasonable appraisal (often a 409A valuation for common stock). For instance, an option’s strike price is usually the FMV of the stock on the grant date. ISO and Section 423 ESPP rules require that if an employee owns >10% of the company, the option price must be at least 110% of FMV. FMV is also used to compute taxable income: when an NSO is exercised, the spread = FMV on exercise date minus strike, which is taxable. Thus, having a defensible FMV for private stock is crucial to avoid giving discounted options (which would violate 409A). In summary, FMV represents the true current value of a share, as determined by market price or valuation.

FICA (Federal Insurance Contributions Act): The U.S. payroll taxes that fund Social Security and Medicare. Both employees and employers must contribute. FICA tax has two portions: Social Security tax (6.2% from the employee + 6.2% employer on wages up to an annual cap) and Medicare tax (1.45% each from employee and employer, plus an additional 0.9% Medicare surtax on high earners, employee-paid only). In the context of equity compensation, income from stock awards is generally subject to FICA taxes just like cash wages. For example, when RSUs vest or NSOs are exercised, the spread/value is considered wages and FICA applies. (ISOs and ESPP shares, if held to a qualifying disposition, do not incur FICA on the spread because they aren’t considered wages.) Employers must withhold the employee’s FICA from any cash available or require a sell-to-cover because FICA is due at the time of the taxable event. Notably, Social Security tax stops after reaching the wage base (which may or may not be hit with salary alone; a large stock vest could push someone over the limit). Medicare has no cap, so big equity gains will always incur at least 1.45% Medicare tax.

Form 4: The form that corporate insiders (officers, directors, and >10% shareholders subject to Section 16 of the Exchange Act) must file with the SEC to report changes in their ownership of company equity securities. Whenever an insider buys or sells company stock, or exercises stock options, or receives an award of stock (any change in beneficial ownership), a Form 4 is generally due within 2 business days to disclose the transaction. The Form 4 is filed on the SEC’s EDGAR system and details the date of transaction, number of shares, price, and the insider’s remaining holdings. Equity plan transactions like option grants (for officers/directors) often trigger Form 4 filings as well (grant of options is viewed as an indirect change in ownership). Timely filing of Form 4 is important to avoid SEC enforcement. Form 3 is the initial report when someone first becomes a Section 16 insider, and Form 5 is an annual catch-all for any transactions that were exempt or missed. Together, these forms increase transparency of insider trading to the market.

Form S-8: A short-form registration statement filed with the SEC by public companies to register shares for an employee benefit plan. Form S-8 allows companies to register securities (common stock, typically) that will be issued under equity compensation plans or other benefit plans, in a simplified process. Once the Form S-8 is effective, the company can freely issue the shares to employees and those shares can be resold by employees immediately (they are not “restricted” securities). Essentially, S-8 covers the legal compliance to make sure that when employees exercise options or when RSUs vest, the resulting shares are registered and can be traded. Companies pay an SEC filing fee based on the number of shares registered. S-8 can only be used for bona fide employee benefit plans and cannot be used to register shares for consultants who promote or market the company’s stock (the SEC has rules preventing abuse of S-8 for capital raising). In practice, whenever a public company adopts a new stock plan or increases the share reserve (through a shareholder-approved amendment), it files an S-8 for the additional shares.

G

Golden Parachute: Colloquially, a contractual agreement that provides a lucrative severance package to certain executives if their employment is terminated as a result of a change in control (e.g., the company being acquired). A golden parachute often includes accelerated vesting of equity awards, cash severance multiples, bonuses, and other benefits triggered by a merger or takeover. The term has a negative connotation when such packages are seen as excessive. From a stock plan perspective, any acceleration or special payout of equity due to a CIC contributes to a golden parachute’s value. U.S. tax code Section 280G (see that entry) will penalize “excess” golden parachute payments (over 3× base pay) by removing corporate tax deductions and imposing a 20% excise tax on the executive. Because of this, many companies include 280G cut-back provisions (capping payouts at the safe harbor) or seek shareholder approval of parachute payments in private companies to avoid the excise tax. In summary, a golden parachute is meant to compensate executives who might lose their jobs in a merger and encourage them to support a deal, but it must be structured carefully to avoid unintended tax costs and shareholder backlash.

Grant Date: The date on which an equity award (such as a stock option or RSU) is granted to the recipient. This is the effective start date of the award’s terms, including the exercise price (for options) which is set based on the stock’s FMV on that date. The grant date is important for several reasons: (1) it often triggers the start of the vesting clock; (2) for accounting, it’s the date when the company measures the award’s fair value (in ASC 718, the grant date fair value is locked in for expense recognition); and (3) for ISOs, it begins the 2-year holding period requirement for favorable tax. A grant date is established when there is a mutual understanding of key terms and approval by the proper authority (e.g., the Compensation Committee has approved the grant and communicated it to the employee). Sometimes there can be administrative delays between approval and communication – accounting rules say the grant date is when both parties have that meeting of the minds on the award details. Example: If a company’s board approves an option for an employee on March 1, 2025, but due to paperwork it isn’t communicated until March 5, the grant date might be March 5 under accounting standards if that’s when the employee is actually informed.

Grant Price: Another term for exercise price or strike price of an option. (See Exercise Price entry.)

H

Holding Period: The length of time an individual holds stock before selling it. This concept is critical for tax outcomes. If stock is held for more than one year before sale, it generally qualifies for long-term capital gains tax rates, which are lower than short-term rates. In equity comp, holding period often refers to specific minimums required for special tax treatment. For ISOs, the holding period requirement for a qualifying disposition is at least 2 years from grant date and 1 year from exercise date. For a qualified ESPP, it’s 2 years from the offering (grant) date and 1 year from purchase. Meeting these holding periods means any gain on sale can be taxed as long-term capital gain (and for ISOs, the bargain element isn’t taxed as regular income at all). Failing the requirement results in a disqualifying disposition (taxed partially as ordinary income). Apart from tax, companies sometimes impose holding periods on shares post-IPO for executives (e.g., an insider must hold onto 50% of net shares from option exercises for one year). In summary, holding period determines whether a sale is short-term or long-term for tax, and in the case of incentive equity, whether special tax benefits apply.

HR (Human Resources) Terms in Equity: Administration of stock plans touches on HR concepts such as employment status (grants usually require one to be an employee or service provider), termination (equity may forfeit or have exercise deadlines at termination), retirement (some plans accelerate or continue vesting if an employee retires under defined criteria), and non-compete or cause provisions (bad leavers may lose equity). For example, stock award agreements may state that if an employee is terminated for cause (serious misconduct), all unvested (and sometimes vested but unexercised) awards are forfeited immediately. If an employee resigns, they often have a standard post-termination exercise window (90 days for options). Some companies count an employee as on “payroll” through their termination date for vesting purposes. Death or Disability often trigger special vesting or extended exercise periods. So, while “HR terms” are broad, in equity comp it’s important to align award terms with HR policies (what happens to your stock options if you leave, etc.). Always check the plan’s provisions on these matters.

I

Incentive Stock Option (ISO): A type of employee stock option that qualifies for special tax treatment under IRC §422. Unlike an NSO, an ISO can allow the employee to potentially pay no regular income tax on the option spread at exercise and instead have the entire gain taxed at capital gains rates upon sale (if certain conditions are met)   . Key ISO rules: they can only be granted to employees (not non-employee directors or contractors); the exercise price must be at least FMV at grant; they are subject to the $100K rule (only up to $100K worth of stock per year can become exercisable as ISOs – any excess becomes an NSO) – see below; and the employee must hold the shares for ≥1 year after exercise and ≥2 years after grant for a qualifying disposition. If those holding periods are met, the profit on sale is all long-term capital gain, and the company gets no tax deduction. If not met (disqualifying disposition), the ISO essentially reverts to NSO treatment: the spread at exercise becomes taxable ordinary income (and deductible to the company). ISOs are also subject to Alternative Minimum Tax (AMT): the option spread at exercise is counted as income for AMT purposes in that year, potentially triggering AMT liability (the employee may recoup some AMT as a credit later if they hold the stock). $100K Rule: This rule means that for each ISO grant, you calculate the total grant date value of stock that would first vest in any calendar year – the portion exceeding $100,000 is treated as an NSO. Practically, companies ensure no more than $100K worth of ISO vests per year (valued at grant FMV); any remainder flips to NSO. Despite the complexity, ISOs are valued by employees for the tax advantage, though many opt to early exercise and start the holding period clock.    

Insider (Section 16 Insider): Typically refers to individuals who are officers, directors, or large shareholders (>10%) of a public company – those subject to Section 16 of the Securities Exchange Act. These insiders have reporting obligations for their trades (Form 4, see that entry) and are subject to trading restrictions and liability for short-swing profits. In equity plans, if an insider receives a grant (say an option), it might be reportable on Form 4, and any exercise or sale definitely is. They also are usually the persons covered by trading blackout periods and 10b5-1 plans due to their access to MNPI. Section 16(b) of the ’34 Act has the short-swing rule: if a company insider both buys and sells the company’s equity within a 6-month period, any profit made is recoverable by the company (insider must disgorge it). Notably, exercising an option and selling the shares within 6 months is typically considered a purchase and sale (the exercise is the purchase) – however, most option exercises (and most RSU vestings) are exempt from short-swing profit rules by SEC rule, provided they were approved transactions. Even so, insiders often use strategies to avoid any appearance of short-swing trading (e.g., they might not sell other shares for 6 months after an option exercise). In summary, “insider” denotes people at the top of the company who have additional legal constraints on their equity transactions.

Insider Trading (Illegal): Trading a company’s stock (or other securities) while in possession of material information about the company that is not public. Insider trading is illegal and can result in severe civil and criminal penalties. For employees and insiders with equity grants, it’s critical to only trade (exercise-and-sell, etc.) during allowed times (outside of blackout periods) and not when aware of earnings results or major developments that haven’t been released to the public. Companies enforce insider trading policies and blackout periods to mitigate this risk. Even for those with no MNPI, trading shortly before major news can look suspicious, so robust compliance procedures are needed. Note: Rule 10b5-1 plans are designed to allow insiders to trade under a preset plan to avoid insider trading issues (see 10b5-1 entry).

ISO 100K Rule: See the Incentive Stock Option entry above. It refers to the $100,000 annual vesting limit for ISOs – only the first $100K worth of stock (valued at grant) that becomes exercisable in any calendar year can retain ISO status. Any excess stock beyond that in the same year is treated as a separate grant of NSOs. This is a technical rule but important for companies to track so they properly report and administer options. If someone receives a very large ISO grant, the company’s stock plan software or administrators will often automatically designate the portion exceeding the limit as “NSO” even if issued under an ISO agreement.

L

Long-Term Incentive Plan (LTIP): A program or plan providing incentives intended to reward performance over a multi-year period. In the equity realm, an LTIP usually refers to a plan for executives that grants performance-based awards (like performance shares or long-term cash incentives) that measure performance over (typically) a 3-year cycle. Many public companies have LTIPs that grant PSUs (Performance Stock Units) which will vest after 3 years if, for example, the company meets certain financial goals or TSR targets relative to peers. Equity plans themselves can function as an LTIP (stock options and RSUs vesting over several years encourage long-term thinking). In some contexts, “LTIP” is used to distinguish these awards from annual bonuses or short-term incentives. Note that in accounting, there’s no difference – it’s more of an internal or plan design term. A company might say: “Under our LTIP, the CEO gets an annual PSU grant that will pay out shares in 3 years based on TSR performance.” In private companies, an LTIP might involve phantom stock or profit interest units designed to mimic equity over a horizon.      

Lookback (ESPP Lookback): A feature of many ESPPs where the purchase price discount can be applied to the stock price at the start of the offering period if that price is lower than the price at the end. In other words, the plan “looks back” to the offering date price. For instance, an ESPP might let employees buy shares at 85% of the stock price on either the offering date or the purchase date, whichever is lower. This can substantially increase the benefit to employees if the stock has gone up during the offering period. Even if the stock has gone down, the employees are protected by buying at a discount off the lower ending price. The lookback provision is permitted under Section 423 plans and is very common (it effectively gives employees an embedded option on the stock’s movement). Offering periods in lookback ESPPs are often 6 months, but some plans have a 24-month offering with purchases every 6 months – this means a lookback of up to 24 months, amplifying potential upside. Example: Stock is $10 on Jan 1 (offering date) and $12 on June 30 (purchase date); a 15% lookback plan would let employees buy at 85% of $10 (since $10 is lower) = $8.50 per share, even though the market price on purchase date is $12 – an instant unrealized gain.

Lock-Up Period: A period after a company’s IPO (or other offering) during which certain shareholders (typically insiders, executives, and pre-IPO investors) are contractually prohibited from selling their shares. A standard lock-up period is 180 days following the IPO pricing date. This is agreed to with the underwriters to help stabilize the stock price by preventing a flood of insider shares hitting the market immediately. During the lock-up, insiders cannot cash out their shares (with limited exceptions like selling to cover taxes on RSU vesting, if allowed). For stock plan administration, this means employees who received pre-IPO equity cannot sell those shares until the lock-up expires, even if their awards have vested and even if trading windows are open – it’s a separate contractual restriction. Many companies send reminders of the lock-up expiration and may coordinate the release of shares (sometimes staggered for large holders). Once the lock-up ends, insiders still must comply with insider trading policies, but at least legally they can sell. Lock-up periods can also apply in acquisitions (e.g., if shareholders receive buyer stock, they might agree not to sell it for some months). Overall, “lock-up period” refers to this temporary freeze on sales post-offering to promote an orderly market.

M

Market Condition: A type of performance criterion for equity awards that is tied to the market price of the company’s stock (or a related index). For example, Total Shareholder Return (TSR) goals or a target stock price are market conditions. If an award has a market condition, whether it vests depends on the stock price performance (absolute or relative) reaching a certain level. From an accounting perspective, market conditions affect the fair value of an award (e.g., via a Monte Carlo simulation) but do not change the requisite service period – meaning an award with a market condition is expensed regardless of whether the condition is met, as long as the employee fulfills the service period. This is in contrast to a performance condition based on internal metrics (like revenue or EBITDA), which can cause expense reversal if not met. Examples: A PSU grant that vests only if the company’s TSR is in the top 25% of a peer group after 3 years is a market condition award. Even if at the end of 3 years the condition isn’t met, the expense is not reversed (because the valuation already took into account the probability). Market conditions are considered harder to set because the company’s performance is measured externally by the stock market, not just by internal goals.

Material Nonpublic Information (MNPI): Information about a company that is both material (an average investor would consider it important to their investment decision) and nonpublic (has not been disseminated broadly to the market). Examples include unannounced earnings results, mergers or acquisitions in negotiation, major product launches or regulatory approvals, leadership changes, etc. Insiders possessing MNPI are forbidden by law to trade on it (see Insider Trading). For stock plan administrators, handling MNPI means coordinating with legal/compliance: for instance, if an employee wants to do an option exercise-and-sell but the company is about to announce a merger, that could be blocked due to MNPI. Trading windows and blackout periods are designed around the release of MNPI (e.g., trading is allowed only when no significant MNPI is outstanding and after quarterly earnings are disclosed). Rule 10b5-1 plans must be entered into when the person has no MNPI and cannot be altered while in possession of MNPI. Understanding what constitutes MNPI is crucial for anyone handling equity transactions in a company. Generally, if you’re an insider and you know something positive or negative that hasn’t been shared publicly, you likely have MNPI and must refrain from stock transactions until it’s public.

Monte Carlo Simulation: In equity compensation, this refers to a valuation technique used to determine the fair value of awards with complex conditions (often market conditions like relative TSR). A Monte Carlo model runs a large number of simulated stock price paths based on assumptions (volatility, correlation with an index or peer stocks, risk-free rate, etc.) to estimate the probability and extent of meeting certain market condition targets. The average outcome of these simulations gives the fair value of the award. Monte Carlo simulations are commonly used for grants like TSR-based PSUs, because a simple Black-Scholes might not capture the path-dependent nature of the award. For example, if a PSU pays out 0% below median TSR and 200% at top-quartile TSR, a Monte Carlo can model thousands of scenarios of stock performance relative to peers to compute the expected payout. Accounting rules say that when a market condition exists, you must factor it into the grant date fair value (you can’t simply assume target outcome). Monte Carlo valuation is a bit of a black box to participants, but it results in an expense that reflects the difficulty of achieving the market condition. Key point: Monte Carlo doesn’t change whether the award vests or not – it only affects how we value it upfront for expense purposes (and expense isn’t reversed if the condition isn’t met).