The Stock Plan Administration Glossary (N-R)

N

Net Exercise: A method of exercising a stock option without paying cash, whereby a portion of the option’s shares are withheld by the company to cover the exercise cost (and any required tax withholding), and the optionee receives the remaining shares. In a net exercise, no shares are sold on the open market (unlike a broker-assisted cashless sell-to-cover). Instead, the company essentially uses the spread value of some shares to “pay” itself. Example: An employee holds options for 1,000 shares at $10 strike; current FMV is $40, so the spread is $30 per share. If they net exercise the entire option, the company might retain 250 shares (250 × $40 = $10,000, which covers the $10,000 cost: 1,000 × $10 strike) and issue the remaining 750 shares to the employee. Net exercises are often allowed for Non-Qualified Stock Options as a way to facilitate exercise when the person doesn’t want to (or cannot) pay cash. The downside is it uses up more shares from the plan (those withheld shares essentially are not issued). Also, a net exercise may still require withholding some shares for taxes on an NSO, which further reduces shares delivered. Many private companies use net exercise, especially at IPO, to help optionees exercise without cash. Note: Net exercise must be permitted by the option agreement or plan; not all plans allow it, but it’s becoming more common.

NIC (National Insurance Contributions): Refers to the UK’s social security taxes, roughly equivalent to FICA in the U.S. If a U.S. company has UK employees participating in a stock plan, UK National Insurance Contributions (NICs) can apply to option exercises or RSU vestings for those employees. Both the employee and employer owe NICs on earned income (which includes equity income) in the UK. Companies often structure NIC agreements or NIC elections with employees to transfer the employer’s NIC cost to the employee (with a sweetener, perhaps). It’s relevant to mention in a U.S. glossary because global stock administration must consider foreign social taxes. For example, when a UK employee exercises an NSO, the difference is subject to income tax and Class 1 NIC (employee at 2%/12% rates depending on income band, employer at 13.8% typically), which the company must account for via payroll. Some UK-approved plans (like CSOPs or EMI options) provide NIC advantages (no NICs if conditions are met). In sum, NIC is the payroll tax in the UK analogous to Social Security/Medicare, and equity gains for UK employees can trigger NIC liabilities that companies need to manage.

Non-Qualified Stock Option (NSO or NQSO): A stock option that does not meet the IRC requirements to be an Incentive Stock Option, and thus is treated differently for tax purposes. NSOs (also called Nonstatutory Stock Options) can be granted to employees, directors, consultants – anyone – with more flexibility than ISOs. The key characteristic is that when an NSO is exercised, the spread (FMV minus exercise price) is taxable as ordinary income to the recipient and is subject to income tax withholding and payroll taxes (FICA) just like a bonus   . The company gets a corresponding tax deduction for that amount. Subsequent appreciation after exercise would be capital gain when the stock is sold. NSOs do not have to adhere to ISO rules like the $100K limit or 10-year term (though many plans still use a 10-year term for all options). In practice, companies often first grant ISOs to employees until limits are hit, and use NSOs for anything above the limits or for non-employees. From the participant’s perspective, an NSO’s downside is the tax at exercise – you might exercise and not sell (holding the stock), but you still owe tax on paper gains. However, NSOs are simpler to administer (no AMT issues, no holding period requirements). Example: Employee has an NSO for 1,000 shares at $5; stock is $20 at exercise; they owe tax on $15,000 as ordinary income in that year. Contrast this with an ISO (no tax at exercise in regular tax). Because of this, some optionees do a same-day sale (cashless exercise) to cover the taxes and capture the net profit.

Nonqualified Deferred Compensation (NQDC): A broad term that includes compensation an employee earns in one year but that is payable in a future year, which does not qualify under strict IRS rules for tax deferral (unlike, say, a 401(k)). Certain equity arrangements can fall under NQDC – notably, an RSU that allows or requires deferral of share delivery beyond vesting (i.e., you vest in the award but don’t get the shares until later) is a form of NQDC. Such plans must comply with Section 409A to avoid penalties. Stock options, by design, are usually exempt from 409A (if granted at FMV and no additional deferral features) so they aren’t typically labeled NQDC. But a phantom stock plan or stock appreciation right paid in cash could be NQDC. The significance of being NQDC is you have to either fit into a 409A exemption or meet its rules about election timing, payout events, etc. Otherwise, taxes and penalties apply immediately. For instance, if an executive is allowed to defer RSU vesting payouts until retirement, that arrangement must comply with 409A (e.g., election made in advance, payout only on a permitted event like separation). So, while “NQDC” is more of a benefits/tax term than an equity term, stock plan pros should recognize when an equity award crosses into deferred comp territory.

O

Option (Stock Option): A contract that gives the holder the right (but not the obligation) to purchase a certain number of shares at a fixed exercise price for a defined period of time. In equity compensation, a stock option typically refers to an option granted by the company to an employee or other service provider as part of compensation. If the option is exercised, the holder buys the stock at the strike price, even if the current market price is higher, thereby realizing a gain (or immediately selling for a profit). Employee stock options usually have a 7–10 year term and vest over time (e.g., 25% per year for 4 years). There are two main types: Incentive Stock Options (ISOs), which have special tax advantages and must follow certain rules, and Non-Qualified Stock Options (NSOs), which are more flexible but result in ordinary income at exercise   . Options align employees’ interests with shareholders – they only have value if the stock price rises above the strike price, encouraging efforts to increase company value. If the stock price stays below the strike (“underwater”), the option is worthless and would expire unexercised. Termination: When employment ends, vested options typically remain exercisable for a short window (90 days for ISOs, often the same for NSOs) unless they are already expired; unvested options typically are forfeited. Example: You receive options to buy 5,000 shares at $10 each. If the stock goes to $18 and you’ve vested in all 5,000, you can exercise and buy at $10, then either hold or sell at $18, netting $8 per share (before tax).

Option Pool: A set number of shares reserved by a company for future equity grants to employees, usually established early in a company’s life. In a startup, the option pool might be created as, say, 15% of the company’s post-investment shares, to be used for hiring and rewarding employees. It’s essentially the initial share reserve for the stock plan. Allocating an option pool dilutes existing owners upfront, which investors account for in funding rounds (often asking the company to create a sufficiently large pool pre-financing so that the dilution is borne by founders). For instance, a company may authorize 1 million shares in its plan as an option pool; as it hires, it grants options out of this pool. If the pool runs low, the company may seek board and shareholder approval to increase it (common before a big hiring push or post-IPO via a new plan or an annual “evergreen” increase). The term “pool” informally just means the available bucket of shares for grants. In cap tables, you’ll see “Unallocated Option Pool” as a line item of shares that are authorized but not yet granted – constituting potential future dilution.

Outstanding Shares: Shares of stock that have been issued by the company and are currently held by shareholders (excluding treasury shares). In context of equity plans, when options are exercised or RSUs are settled, new shares are issued, thereby increasing the number of shares outstanding. Outstanding shares are used to calculate metrics like earnings per share and to determine ownership percentages. They include all classes (if referring broadly) or often just the common shares (for voting power and ownership). Contrast with authorized shares (the maximum allowed to issue) and issued shares (shares that have ever been issued, including ones later repurchased). For practical purposes, “outstanding” means shares currently in investors’ hands or employees’ hands. If a company has 10 million shares outstanding and an employee exercises options for 100,000 shares, the new total outstanding becomes 10.1 million (assuming those were new issue shares). When tracking dilution or overhang, you consider how awards translate into additional outstanding shares if exercised/vested. Also, fully diluted shares outstanding means the total outstanding plus all shares that would be added if all options, warrants, convertibles, etc., were exercised.

Overhang: The dilution potential represented by outstanding yet unexercised/unvested equity awards plus any remaining shares available for grant under the stock plan. It is often expressed as a percentage of the company’s total shares (pre-overhang). Overhang answers the question: “How much could current shareholders be diluted if all outstanding awards vest and all remaining pool is used?” It’s calculated as (A + B) / (A + B + C), where A = shares underlying outstanding awards (vested or unvested options, unvested RSUs, etc.), B = shares remaining available in the plan reserve, and C = currently outstanding shares. For example, if a company has 1 million shares outstanding, 200k in options/awards outstanding, and 100k left in the plan, the total overhang = (200k + 100k) / (1,000k + 200k + 100k) = 23%. That indicates that existing shareholders could be diluted by up to ~23% as the plan is utilized. High overhang can be viewed negatively by investors as it implies significant future dilution. Companies in tech/biotech might run higher overhang due to heavy equity use, whereas more mature firms keep it lower. Overhang is managed by granting carefully, doing share buybacks to offset issuance, or obtaining shareholder approval for more shares only as needed. Proxy advisors often compare a company’s overhang to industry norms. Reducing overhang can happen as options expire/forfeit unexercised (reducing A) or if a plan is terminated without using the remaining pool (eliminating B), but typically it’s managed via careful planning of share requests.

P

Par Value: A nominal value assigned per share in the corporate charter (e.g., $0.0001 per share) which has little practical significance today except for legal and accounting purposes. Par value is the minimum price generally that shares can be initially issued at (to avoid legal issues issuing below par). For equity plans, par value matters when issuing new shares: for example, when RSUs vest, the company must at least receive the aggregate par value of those issued shares (often it’s taken from the option exercise price or from the employee’s tax withholding payment). Most companies set a very low par value so it doesn’t impede issuing shares. Par value shows up on the balance sheet in the common stock line (number of shares issued × par value). In summary, par value is a formality from an earlier era – it doesn’t affect market price or grant value.

Performance Share Unit (PSU): A form of restricted stock unit where the number of units that ultimately vest is tied to achieving specific performance targets (financial, operational, market-based, etc.). Each PSU typically represents a right to receive one share of stock (or equivalent value) if performance criteria are met over a defined period (usually multi-year). For example, a grant might say: the executive receives between 0% and 200% of 1,000 target PSUs after 3 years, depending on cumulative EPS or relative TSR performance. If goals are exceeded, perhaps 2,000 PSUs vest (200%); if partially met, maybe 500 vest; if below threshold, none vest (award is forfeited)     . Performance criteria can be internal metrics (EPS, revenue, EBITDA, etc.) or market conditions (stock price, TSR vs. peers). From an accounting perspective, if vesting is based on performance conditions, expense is recognized according to the probable outcome and adjusted if estimates change (whereas market-condition PSUs are valued probabilistically at grant and not adjusted for outcomes). PSUs are popular for aligning executives with long-term company goals and shareholder returns. They often include a service requirement as well (must stay employed through the end of the performance period). In some plans, PSUs accrue dividend equivalents that pay out proportionally to the number of shares that actually vest.

Phantom Stock: A type of cash-based long-term incentive that mirrors the value of actual stock without granting real shares. In a phantom stock plan, participants are credited with a number of phantom “shares” that track the company’s stock price (and sometimes accrue dividend equivalents). After a set period or at a triggering event (like an IPO or change in control), the participant receives a cash payment equal to the value of the phantom shares. For example, an executive might be granted 5,000 phantom shares at $0; three years later, if the stock is $20, they get $100,000 in cash. Phantom stock thus provides equity-like economics (gain if the stock rises) without actually issuing shares or diluting ownership     . It’s often used by private or LLC companies that either can’t or don’t want to issue real equity. It can also be simpler in some regulatory aspects (no shareholder rights issues). However, phantom stock is typically considered deferred compensation, so 409A rules must be followed to avoid penalties (payouts often tied to specific events or fixed dates). Also, unlike real stock, the company must come up with the cash for payouts, which can be significant. Some phantom plans pay out only on a change in control (so they act like a cash parachute if the company is sold). In summary, phantom stock gives employees a stake in the company’s value growth without actual stock ownership.

Plan Amendment: Changes made to the terms of a stock plan, usually subject to board and sometimes shareholder approval. Amendments might increase the share reserve, extend the plan’s term, add new award types, or modify provisions (like adding an evergreen feature or changing vesting on death). Material amendments (especially increasing shares or changing eligibility or types of awards) generally require shareholder approval for public companies per exchange rules and good governance. From an admin standpoint, plan amendments must be carefully communicated and incorporated into how grants are administered. For instance, if a plan is amended to allow RSUs in addition to options, the company can start granting RSUs once the amendment is effective. If additional shares are added, an S-8 filing will follow. Non-material amendments (like minor procedural changes) might be allowed by the board alone. Keeping plan documentation up-to-date with all amendments is important for audits and compliance.

Post-Termination Exercise (PTE) Period: The window of time an option holder has to exercise vested stock options after their employment or service terminates. Most plans set a standard post-termination exercise period, commonly 90 days for termination other than death or disability. This means if you quit or are fired, you have 90 days from your termination date to exercise any vested options; after that, any remaining vested options expire. For terminations due to death or disability, many plans extend the exercise period (e.g., to 12 months or even the full remaining term). The reason for the tight 90-day limit on ISOs is that beyond 3 months post-termination, an ISO by law loses its ISO status and becomes an NSO. Rather than deal with that, companies usually just expire the ISO at 90 days. Employees should be counseled about this period: if they don’t exercise in time, they forfeit the value. Some companies have moved to lengthier PTE windows (even up to the full life of the option) to be employee-friendly, but these can have tax and accounting implications. Note: During a PTE window, the person is no longer an insider (if they left the company entirely), but they still need to abide by any contractual lockups or consider if they possess MNPI. Once the window closes, any unexercised options are canceled.

Proxy Advisory Guidelines (Burn Rate & Overhang): Institutional Shareholder Services (ISS) and Glass Lewis, the proxy advisory firms, have guidelines on acceptable burn rate, dilution, and plan features when shareholders are asked to approve new equity plans or share increases. For instance, ISS calculates a company’s 3-year average burn rate and compares it to an industry benchmark; if it’s too high, ISS may recommend voting against adding more shares. They also look at overhang levels and plan provisions (like no reload options, minimal liberal change-in-control vesting triggers, etc.). While not a glossary term per se, understanding these guidelines is crucial for stock plan professionals when designing or amending plans, as a negative proxy recommendation can jeopardize shareholder approval. It’s why, for example, companies might not request more shares than necessary, or they add plan clauses that prohibit repricing without shareholder approval – to align with best practices. So in an equity glossary, one might mention “Proxy advisors” or “ISS burn rate” as the de facto standards companies strive to meet to get plan approvals.

Q

Qualifying Disposition: The sale or transfer of stock acquired from an ISO or a qualified ESPP that meets the required IRC holding periods, thereby qualifying for favorable tax treatment. For ISOs, a qualifying disposition means the stock was held at least 2 years from grant date and 1 year from exercise date. For ESPP, held 2 years from offering date and 1 year from purchase. If these criteria are met, the disposition is “qualifying” and the income is taxed as long-term capital gain on the difference between the sale price and the purchase price   . Importantly, the employer does not get a tax deduction in this case (because the employee isn’t recognizing ordinary income). By contrast, see Disqualifying Disposition for when the holding periods are not satisfied (leading to ordinary income on the bargain element). Example: Alice exercises an ISO on Jan 2023 and sells the shares in Feb 2025 – more than 2 years from grant and 1 year from exercise – that’s a qualifying disposition; her entire gain above the exercise price is a long-term capital gain, and the company gets no deduction.

QSBS (Qualified Small Business Stock): A tax concept (IRC §1202) not specific to compensation, but sometimes relevant to founders or early employees: stock of a C-corp that meets certain criteria (originally issued, under $50M assets, active business, certain industries excluded) and held for ≥5 years can qualify for exclusion of some or all of the capital gains on sale (up to $10M or 10× basis). Some employees exercise options early or hold shares to take advantage of QSBS. This is more a startup financing/tax term than an equity comp plan term, but savvy employees ask about it. For completeness: if an employee early exercises stock options in a startup, those shares might be QSBS, and after 5 years any gain could be 100% tax-free federally (up to the limit). Always consult tax advisors on this – it’s a big personal tax planning consideration for startup equity.

R

Restricted Stock Award (RSA): An award of actual shares of stock that are subject to certain restrictions, usually vesting based on continued service (time-based) or performance. Restricted stock is granted and the recipient becomes a shareholder immediately (often with voting rights and sometimes dividends), but if they fail to satisfy the vesting conditions, the shares are forfeited or subject to the company’s right of repurchase at the issue price. Because the employee owns the shares upfront, they can choose to make an 83(b) election within 30 days of grant to be taxed on the initial value and then treat all future appreciation as capital gains. RSAs are often used for founders or early employees when the share price is very low (so the 83(b) tax is minimal). Key difference from RSUs: an RSA is actual stock from day one; an RSU is just a promise until vesting. RSAs may be granted at no cost or at a purchase price (which could be a nominal par value or FMV). In private companies, purchase-price restricted stock (at FMV) is common for founders to establish ownership while allowing the company to buy back unvested shares if they leave early. Example: A founder is issued 1 million shares of restricted stock, vesting over 4 years; they file 83(b) on near-$0 value. If they leave after 1 year, the company repurchases the 75% unvested at $0.001/share (par value). If they stay, they own all shares outright after 4 years.      

Restricted Stock Unit (RSU): A promise to deliver a share of stock (or the cash equivalent of a share) upon satisfying specified vesting conditions. Unlike RSAs, RSUs are not actual stock until they vest. At vesting, the company “releases” shares to the participant (or, less commonly, pays cash of equal value). RSUs have become a very popular form of equity compensation, especially in public companies, because they are simple – no exercise price, no action needed by the employee to realize value. They always have some value as long as the stock price is above $0. Standard RSUs vest with continued service (e.g., 25% per year for 4 years or all after 3 years), but they can also have performance conditions (PSUs). When RSUs vest, the value of the stock at vest is treated as ordinary income to the employee (subject to tax withholding). Companies often automatically withhold a portion of the shares to cover taxes (“net settle”). RSUs do not qualify for special tax treatment like ISOs – they are effectively like a cash bonus in how they’re taxed, except paid in stock. Private companies generally avoid RSUs that settle before a liquidity event because of valuation and tax-withholding difficulties; however, pre-IPO companies may grant double-trigger RSUs, which vest on service but only deliver shares upon an IPO (second trigger). This delays taxes until liquidity. Example: An employee gets 100 RSUs, vesting 100% at 2 years. At vesting, the stock is $20, so $2,000 is added to her W-2 income; she net gets maybe ~60 shares after withholding. Now she can hold or sell those shares (subject to insider trading windows if applicable).     

Rule 144: An SEC rule that provides a safe harbor for the public sale of “restricted” stock (stock acquired in private offerings, including through equity plan grants) and stock held by affiliates (insiders), without registration. Rule 144 sets forth conditions such as: a holding period for restricted securities (for companies subject to SEC reporting, at least 6 months; for non-reporting, 1 year), limits on the amount that can be sold by an affiliate in any 3-month period (typically, the greater of 1% of outstanding shares or the average weekly trading volume), requirement that the company is current in its SEC reports, and for affiliates, that the sales are done in unsolicited broker transactions. Affiliates must also file a Form 144 with the SEC when selling under Rule 144 (if over a certain size). In equity comp: if an employee receives stock via option exercise (cash exercise) or RSU vesting without an S-8 (like pre-IPO or an exemption), those shares are “restricted” and Rule 144 is the mechanism to eventually sell them publicly. Post-IPO, once the lock-up expires and the Rule 144 holding period is met, employees can sell their shares – often through a broker that handles Rule 144 sales by either dribbling out shares under the volume limits or ensuring the requirements are met. After a certain time and if the seller is not affiliate, sales can occur without any volume limits (e.g., a non-affiliate who held restricted stock for >1 year can sell freely). Essentially, Rule 144 is what turns private/company-issued shares into freely tradable shares by detailing when and how they can be sold legally. Stock plan administrators sometimes assist with legend removal once Rule 144 conditions are satisfied, so the shares can be sold without restriction.

Rule 701: An SEC exemption that allows private companies to offer and sell securities (like stock options, RSUs, and restricted stock) to employees and certain service providers without SEC registration. Rule 701 is critical for startups and other private firms to run equity compensation plans. The rule has limits on the amount that can be issued: generally, in any 12-month period, the company can sell securities up to the greater of $1 million, 15% of its total assets, or 15% of the outstanding securities of that class. If more than $10 million in securities are sold in a 12-month period, enhanced disclosure (including financial statements and risk factors) must be provided to participants. Stock plan grants count as “sales” (options are valued at their Black-Scholes value at grant for this). Companies must aggregate all 701 sales (option grants, RSUs, etc.) to ensure compliance with the limits. The “701 disclosure” requirement at >$10M is something late-stage startups often contend with (they need to give participants financial info, which companies may guard closely). Upon an IPO, Rule 701 no longer applies (S-8 takes over for new grants; existing 701 shares can be freely sold after 90 days under 144 if conditions met). In summary, Rule 701 is a safe harbor that makes it easy for private companies to widely grant stock options/awards as compensation without registering those securities with the SEC. Violating it can have consequences (the SEC has taken action when companies blew past 701 limits without disclosure).