The Stock Plan Administration Glossary

S

Section 16: Refers to Section 16 of the Securities Exchange Act of 1934, which imposes reporting and trading requirements on insiders of public companies (officers, directors, and >10% shareholders). In equity comp context, being a “Section 16 officer” means your grants, exercises, and trades are subject to strict disclosure on Forms 3, 4, 5 and potential short-swing profit recovery. Section 16(a) requires reporting of ownership changes (hence Form 4 within 2 days of, say, an option exercise or RSU vest). Section 16(b) is the short-swing profit rule: any profit from matching a purchase and sale within 6 months must be disgorged to the company. Importantly, many equity plan transactions are exempt from short-swing profit calculations by SEC rules (e.g., most option grants, most exercises where no hold of stock occurs, RSU vestings) but still, insiders and counsel monitor any non-exempt transactions. For stock plan administrators, if an employee becomes a Section 16 insider, their equity awards now require tracking for Form 4 filings. Also, any plan design (like allowing an officer to do a stock swap exercise) must consider if that swap is a “purchase” for 16(b) matching. Section 16 insiders often have to coordinate all trades with legal counsel due to these rules.

Share Reserve: The pool of shares authorized under an equity plan that are reserved for issuance pursuant to awards. If a plan has a share reserve of 5,000,000 shares, any grants made count against this reserve (e.g., granting options for 500k shares leaves 4.5M available). When awards are exercised or vest and result in issued shares, those shares come out of the reserve. Many plans have “reload” or evergreen features to increase the reserve over time (subject to shareholder approval or automatic small additions annually). Some plans also have fungible share designs where different types of awards count more heavily against the reserve (e.g., an RSU might count as 2 shares, reflecting it’s full value). Monitoring the reserve is a key admin task: you cannot grant more awards than the reserve allows (overhang aside, it would violate the plan). Public companies disclose how much remains available in the reserve in proxies. When the reserve gets low, companies will go to shareholders to request additional shares (and the proposal often includes data on burn rate and dilution to justify the ask). Also, if an award is canceled or forfeited, most plans allow those shares to return to the reserve (recycle) for future grants. However, some shares that have been used (like upon exercise, or withheld for taxes) may not go back – plan terms vary. In short, the share reserve is the lifeblood of the plan – once it’s depleted, no more equity can be granted without replenishment via amendment.

Spread (Bargain Element): The difference between the market price of a share and the exercise price of an option (or the purchase price of an ESPP share). It represents the immediate gain to the option holder upon exercise – essentially the option’s intrinsic value. For example, if an option has a $10 strike and the stock is $30, the spread (or bargain element) is $20 per share. This figure is crucial for tax purposes: for NSOs, the spread at exercise is taxable ordinary income; for ISOs, the spread is reported for AMT (alternative minimum tax) calculations, and not for regular tax (assuming a qualifying disposition). The size of the spread can influence exercise behavior – a large spread means a big tax hit if exercised and held (for NSOs). In an acquisition, the spread times the number of options often represents the payout to option holders if options are cashed out. Sometimes “spread” is used to refer to the built-in gain of an award or even a whole plan (e.g., “total in-the-money option spread” meaning aggregate intrinsic value of all outstanding options). In summary, the spread = value – cost, and it’s the real-world “profit” from an option. If an option is underwater (stock below strike), the spread is zero (no profit). If it’s in the money, the spread is positive. Employers must withhold tax on NSO exercises based on the spread amount.

Stock Appreciation Right (SAR): A type of equity award that gives the holder the right to receive the appreciation in the company’s stock over a set period, without having to pay an exercise price. A SAR is often settled in shares (or cash) equivalent to the increase in stock price from grant to exercise. For example, a SAR might be granted with a base price of $10 (akin to an option strike). If the stock is $18 at exercise, the participant gains $8 per SAR. If settled in shares, they’d get shares worth that $8 gain (perhaps 0.444 shares if price $18, because $8/$18 ≈ 0.444 shares per SAR). If cash-settled, they get $8. SARs thus mirror the economic benefit of options but require fewer shares to deliver the net value. SARs can be granted in tandem with options (old practice, where exercising one cancels the other). The taxation of SARs is like that of NSOs if settled in stock: no tax at grant or vest, ordinary income on the value at exercise (and deductible to company). A big advantage is that an employee doesn’t have to pay an exercise price – they automatically receive only the net gain, which can reduce the cash or shares needed for transactions. SARs are less common in U.S. tech companies (options and RSUs dominate) but are seen in some plans, especially where minimizing share count is desired. They are also used internationally where using actual options is less common. Note: A SAR settled in stock can be structured to be exempt from 409A (like an option) if base price ≥ FMV at grant and it’s only settled in shares; a cash SAR is typically NQDC subject to 409A rules because it’s effectively a cash bonus payable in the future.

Stock Option: See Option entry above. It is repeated here to reinforce: a stock option is a right to buy shares at a fixed price in the future. Two types: ISO and NSO (see respective entries). Vesting, expiration, and exercise method are key terms for stock options.

Stock Split (or Reverse Split): An action by the company to increase (split) or decrease (reverse split) the number of outstanding shares by a certain ratio, which proportionally affects share price. In a stock split, each shareholder gets more shares while value remains the same (e.g., a 2-for-1 split doubles shares and halves the price). For equity awards, splits adjust the terms: the number of shares in outstanding awards and the exercise prices are adjusted so that the intrinsic value is unchanged. For example, an employee has an option for 100 shares at $50; the company does a 2-for-1 split; after, the employee will have an option for 200 shares at $25. This is typically mandated by the equity plan’s anti-dilution provisions. Reverse splits (common before an IPO to boost share price to a reasonable trading range, or for a struggling stock to avoid delisting) work oppositely: e.g., a 1-for-10 reverse split would turn an option for 1,000 shares at $1 into an option for 100 shares at $10. Stock plan administrators must ensure all systems (broker, internal records) accurately reflect post-split adjustments. Splits generally are not taxable events and do not trigger new grant dates or anything – they’re just mechanical changes. However, any fractional shares resulting from splits for outstanding awards usually are rounded (often down to nearest whole share).

Substantial Risk of Forfeiture: A concept from IRC §83 – if property (like stock) is transferred to a service provider but is subject to a substantial risk of forfeiture (SRF), then the taxation is delayed until that risk lapses (i.e., until vesting). For example, when restricted stock is granted subject to vesting, the stock is under SRF until the vesting condition is met; thus by default the employee isn’t taxed until vesting. SRF includes conditions like requiring continued employment for a period, or performance conditions. An 83(b) election allows one to elect to be taxed at transfer despite the SRF, effectively ignoring the delayed taxation rule. In designing awards, ensuring there is a valid SRF is important so that tax is appropriately timed (if something is essentially guaranteed, it may not qualify as an SRF and could be taxed immediately). For deferred comp and 409A, SRF also matters – under 409A, an amount isn’t considered deferred until after any SRF lapses. In everyday equity terms, when someone says “unvested stock isn’t taxed yet because it’s subject to forfeiture,” they are referencing this concept. SRF ends at vesting (or when restrictions could lapse, even if one could technically forfeit by leaving voluntarily – voluntary forfeiture usually doesn’t count as SRF past the first possible vest date).

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Tax Withholding (on Equity Compensation): Employers are required to withhold applicable taxes when employees realize income from equity awards. For NSOs, this is at exercise on the spread; for RSUs/Restricted Stock, at vesting on the value of shares; for ESPP, only if it’s a disqualifying disposition (then ordinary income portion). Companies typically withhold income tax, plus Social Security/Medicare (FICA) and any state/local taxes. In the U.S., equity income is often treated as “supplemental wages” for withholding purposes, which means a flat federal withholding rate – currently 22% for supplemental income up to $1 million and 37% for amounts over $1 million (higher wage earners often owe more than 22% at tax return time, but that’s the default withholding). Withholding methods: For RSUs, employers usually net settle – i.e., hold back enough shares to equal the tax and remit cash to the authorities (so the employee gets fewer shares). For option exercises, if it’s a cash or same-day sale exercise, the broker will set aside the required withholding from proceeds. If an employee does a cash exercise and wants to hold the stock, they must provide cash to cover the taxes, since the company must deposit withholding (there’s an option on the exercise form to sell some shares to cover taxes). FICA (Social Security/Medicare) withholding applies up to the Social Security wage cap (for SS) and no cap for Medicare. This is why sometimes year-end vestings are timed when Social Security may already be maxed out by regular pay, to save employee a bit of immediate cash flow (but ultimately tax is tax). Internationally, each country has its own withholding rules, and companies must comply in each locale, often through local payroll. Adequate tax withholding and reporting (W-2, 1099, etc.) is one of the most important administrative tasks in equity comp – failures can result in penalties to the employer.

Total Shareholder Return (TSR): A performance metric that calculates the total return to shareholders, including both stock price appreciation and dividends. TSR is usually expressed as a percentage: for a given period, it measures how much an investment in the stock grew (or shrank) considering share price changes plus reinvested dividends. For example, if a stock was $50 at the start of the year, paid $2 in dividends during the year, and ended at $55, the one-year TSR would be [(55 – 50 + 2) / 50] = 14%. TSR is widely used in performance-based equity plans (like PSUs) as it directly reflects investor outcomes. Companies often use relative TSR – comparing their TSR to a peer group or index. Awards might vest at target if TSR is at median of peers, max vest at top quartile, etc. TSR is considered a market condition for accounting purposes. It’s appealing as a metric because it’s objective and holistic (stock price + dividends), but it can be volatile and influenced by market factors beyond management control. Still, about half of large companies include TSR in their long-term incentive plans. For employees, TSR-based awards mean their payout depends on how well shareholders fared – aligning interests. One consideration: in bull markets, many companies have strong absolute TSR, so relative positioning is key. Calculating TSR for awards can get technical (e.g., averaging prices to smooth endpoints, handling changes in peer groups, etc.), but conceptually it’s straightforward – it’s the total return on the stock.

Transfer Agent: A third-party firm (or internal department) that tracks and facilitates changes in ownership of a company’s stock. Transfer agents maintain the official shareholder register for public companies, keeping record of every registered shareowner’s name and number of shares. They handle issuance of new shares (e.g., when options are exercised or RSUs vest, the transfer agent issues the shares to the employee, often in book-entry form) and cancellation of shares (e.g., when shares are surrendered or retired). They also manage stock certificates, dividend payments, stock transfers, and corporate actions like stock splits. In stock plan administration, the transfer agent is an important partner: for example, upon an IPO, a private company’s equity awards get transitioned to the transfer agent’s records; when employees leave and need to get stock certificates, the transfer agent provides those; when a company does a stock split, the transfer agent adjusts all holdings including plan-related positions. Many companies use a direct registration (DRS) system, so employees get statements from the transfer agent for shares they own outright. While the equity plan system might show an employee has X shares, the transfer agent is the official source that those X shares are indeed issued and outstanding in the employee’s name. In smaller companies, the stock plan administrator might interact with the transfer agent to get new share blocks for exercises, etc. Public companies often integrate their stock plan provider with the transfer agent electronically for real-time updates.

Trigger (Single-Trigger vs Double-Trigger): See Acceleration entry under “A.” In short, single-trigger refers to vesting acceleration (or sometimes payout of awards) that happens upon one event alone (commonly a change in control). Double-trigger means two events are required (usually CIC + termination without cause or resignation for good reason). “Trigger” events are defined in the plan or agreements. In RSU context for private companies, the term “double-trigger RSU” is common – first trigger is time vesting, second trigger is an IPO or change in control (liquidity event); until both happen, the RSU doesn’t deliver shares. This was devised to avoid employees being taxed on RSUs before there’s a market to sell shares to cover the tax. In general, knowing what triggers cause what consequences for equity (acceleration, payout, termination) is crucial in plan administration.

U

Underwater Option: A stock option with an exercise price that is higher than the current market value of the underlying stock. In other words, the option’s strike price exceeds the stock price, so exercising it would yield no profit (you’d be paying more than market price for the shares). An underwater option has no intrinsic value – only time value (and oftentimes employees consider it essentially worthless unless they expect the stock to rebound above the strike before expiration). For example, an option with a $50 strike is underwater when the stock is $30. Underwater does not automatically mean the option gets canceled – it remains outstanding (and could still become valuable if the stock price rises above $50). However, persistent underwater options can be problematic for morale and retention. Companies may choose to address them through repricing (lowering the strike price to current FMV) or option exchange programs (offer employees a chance to swap underwater options for fewer new options at a lower price or for RSUs) – subject to shareholder approval for public companies in most cases. During the 2008–2009 financial crisis, and again in early 2020 pandemic drop, many companies had large numbers of underwater options and some implemented such programs. Tax and accounting: repricing is treated as a modification (can trigger new measurement and comp expense); for ISOs, a repricing is often treated as a new grant which could affect ISO status. Regardless, an “underwater” option remains part of overhang but isn’t an effective incentive, so companies monitor how much of their option pool is underwater.

Unvested vs. Vested: Unvested refers to portions of an equity award or shares that are not yet earned and are still subject to forfeiture if the individual does not fulfill the required conditions (like continuing employment to a future date or achieving performance goals). Vested means the individual has earned the right to keep the award, and it is no longer contingent on further service or performance (though an option still needs to be exercised). For example, if you have an option for 1,000 shares vesting 25% per year, after 1 year you might have 250 shares vested and 750 unvested. If you left at that point, you’d forfeit the 750 unvested shares and keep (and possibly exercise) the 250 vested. Unvested stock or awards are essentially in limbo – you don’t fully own them yet. In the case of restricted stock, you might actually hold the shares but they are subject to the company’s right to repurchase if unvested (so they’re “unvested shares”). Plans often use terms like “forfeit unvested awards upon termination” to clarify what happens. Once vested, awards may still have other restrictions (like trading windows or lock-ups), but the person’s right to the award is secure (except in cases of clawback or if they are terminated for cause which sometimes voids even vested benefits). In summary, “vested” = yours to keep (subject to exercising if an option), “unvested” = not yet yours and at risk of forfeiture.           

Upgrade Provision (Reload Options): Historically, some stock option plans included “reload” features: when an employee exercised options using already-owned shares (a stock swap exercise), they would automatically receive a new option grant (reload option) for the number of shares used to pay the exercise price and/or taxes. The idea was to keep the employee’s potential ownership level consistent (they don’t lose future upside by using shares to exercise). These reload options usually had the same expiration as the original and vested after a short period or had none. Reload options were popular in the 1990s but have fallen out of favor due to accounting changes (they created additional expense) and investor perceptions (reloads can be seen as overly generous). Nowadays, very few companies use reload provisions, and many proxy voting policies disallow them. We mention it as a glossary item for historical context or if you encounter older plans. Modern equivalent? Not much – maybe additional RSU grants given to cover taxes (but that’s not automatic like reload, just at company discretion). If you find “reload” in a plan, it means an automatic grant upon exercise under specific conditions.

V

Vesting: The process by which an individual earns the right to own an equity award or benefit over time or upon meeting conditions. When an award is “vested,” it is no longer subject to forfeiture (assuming any exercise price is paid, in the case of options). Vesting can be time-based (also called service-based) – e.g., 25% of the award vests each year for four years of continued service – or performance-based, or a combination. Common vesting schedules in U.S. tech companies for stock options/RSUs are 3- or 4-year schedules, often with a one-year cliff (no vesting for 12 months, then gradual vesting thereafter) for new hires. Graded vesting means portions vest at intervals (like 1/48th of an option vests each month for 4 years). Cliff vesting means no interim vesting until a big chunk at once (often the first year’s worth). Vesting encourages retention: if an employee leaves before full vesting, they forfeit the unvested part. Some awards can have 100% cliff vesting at a future date (e.g., an RSU that vests only at the 3-year mark). Performance vesting could be, say, 50% of units vest if revenue hits $X by year-end. Additionally, companies may accelerate vesting in certain scenarios (see Acceleration). Vesting is usually documented in the grant agreement. Until an award vests, it is typically unearned and unowned by the employee (except in restricted stock where they have the shares but subject to forfeiture). Upon vesting: for options, the participant can now exercise those vested options at any time up to expiration (even after leaving, within the grace period); for RSUs or restricted stock, the vesting event often triggers share delivery or lifting of restrictions. In accounting terms, vesting is tied to recognizing expense – expense is spread over the vesting period (the requisite service period).     

Vesting Period: The span of time (or the duration of service/conditions) over which an award vests. If someone says “the vesting period is four years,” that means from grant date to the final vesting date is four years. Within that, there might be intermediary vesting milestones. The vesting period for a cliff-vested award is the entire time until the cliff. For a performance award, the vesting period might be defined by the performance measurement window (e.g., 3-year performance period). This term is often used interchangeably with “vesting schedule,” although schedule usually implies the pattern (dates/percentages), whereas period is the overall length. Knowing the vesting period is important for when an employee will fully earn the award and for how long the company will incur compensation expense. Some plans allow partial acceleration if someone’s employment ends after a long portion of the vesting period (e.g., prorated vesting for retirement-eligible employees). In accounting, the total vesting period might include explicit + implicit service (if an award can vest faster on performance, you still might expense over the expected period to actual vest). But generally, it’s straightforward: an award vests over X years, that’s the vesting period.

Volatility (Stock Volatility): A measure of how much a stock’s price fluctuates over time, and a key input in option pricing models like Black-Scholes. Volatility is usually expressed as an annualized standard deviation of returns. In the context of equity compensation, expected volatility of the company’s stock price is needed to calculate the fair value of stock options (and SARs) for accounting expense under ASC 718. Companies typically estimate volatility by looking at their own historical stock price fluctuations, and sometimes those of peer companies (especially if the company itself doesn’t have a long trading history or is private – in the latter case, peer-group volatility is used). A higher volatility increases the calculated value of an option (because there’s a greater chance the stock could swing high above the strike at some point). Conversely, low volatility means the stock is stable, and the option is less likely to move deep in the money, reducing its value. For startup valuations (409A), projected volatility might be in the 40–70% range depending on sector; for mature public firms, it might be 20–30%. When communicating to employees, volatility isn’t directly discussed, but it underlies the cost of an option. Also, implied volatility from market-traded options can inform expected vol. In summary, volatility is a statistical risk/variability metric essential for option valuation but also conceptually indicates how “risky” the company’s stock is – riskier (more volatile) stocks make options more valuable (and also more unpredictable in outcomes).

W

Warrants: A type of security that, like a stock option, gives the holder the right to purchase company stock at a specified price, typically over a long period. Warrants are often issued in connection with financing transactions or commercial deals (for example, a lender or an investor may receive warrants as a bonus for providing capital). They are similar to employee stock options in mechanics (exercise price, term, sometimes vesting), but are usually issued to outside investors or partners rather than employees. One key difference: warrants are often detachable and transferable (they may even trade like securities themselves), whereas employee options are not transferable. Warrants can have longer durations (10+ years) and sometimes have cashless exercise features. From an equity plan perspective, warrants are not typically part of the employee equity plan share reserve – they are issued outside of it (but they still contribute to overall dilution). When counting fully diluted shares, outstanding warrants are included just like options. Accounting for warrants (if issued to investors) falls under different rules (they might be equity or a liability depending on terms). A company’s cap table should track warrants along with stock and options. Example: A startup raises money from an investor who, in addition to shares, gets a warrant for 50,000 shares at an exercise price equal to today’s price, expiring in 5 years. If the company’s stock rises, the investor can exercise the warrant to buy 50k shares at that preset price, benefiting from the increase.      

Withholding (Tax Withholding): See “Tax Withholding” under “T.” It refers to the employer’s obligation to collect income and payroll taxes at the time equity compensation income is recognized by the employee. Common methods include net share withholding, cash withholding via payroll, or sell-to-cover transactions. Proper withholding ensures the IRS (and state tax agencies) get tax payments in real time, and the employee doesn’t face a huge tax bill later.

Wrap-Up: Employee Education & Communication: (Not exactly a term, but a critical aspect.) Equity compensation involves many complex terms and concepts (as seen in this glossary). Companies should strive to educate participants about what they have – e.g., what it means that an option is underwater, why making an 83(b) election on a startup stock grant might save taxes, how ESPP purchases work, or what restrictions apply when they become an insider. A well-informed employee understands the value and risk of their equity awards, leading to better appreciation of the compensation and fewer surprises (like a tax hit on RSUs or expiration of an option). Regular training sessions, concise FAQs, and glossaries like this one are all tools to demystify equity awards for everyone from rank-and-file employees to executives. Equity is a powerful motivator and wealth builder when managed and communicated properly.