Equity Compensation Plans & Design Flashcards
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Read the first 7 Equity Compensation Plans & Design flashcards as text
A company wants to provide equity awards that do not require employees to pay an exercise price. Which plan type best meets this objective?
Answer: Restricted Stock Units (RSUs)
RSUs deliver shares to employees upon vesting without requiring any purchase or exercise price.
Under IRC Section 422, ISOs may only be granted to which category of individuals?
Answer: Employees of the company or a qualifying subsidiary
ISOs are exclusively available to employees; consultants, directors, and other non-employees are ineligible.
A plan provision that accelerates vesting of all outstanding awards upon a change in control is known as:
Answer: Single-trigger acceleration
Single-trigger acceleration causes vesting to speed up upon a change-in-control event alone, without requiring a second triggering event such as termination.
What is the primary purpose of a 'liberal share counting' provision in an equity plan?
Answer: To allow shares surrendered for tax withholding or exercise price to be returned to the plan reserve
Liberal share counting recycles shares used to pay taxes or the exercise price back into the plan reserve, extending the life of the share pool.
Which of the following best describes a 'fungible share ratio' in an equity plan?
Answer: The conversion rate applied when full-value awards reduce the plan's share reserve at a higher rate than options
A fungible ratio (e.g., 1.5:1 or 2:1) causes each full-value share granted (RSU/restricted stock) to count as more than one share against the reserve, reflecting its higher value versus an option.
A company grants stock options with a four-year graded vesting schedule (25% per year). An employee resigns after two years. What happens to the unvested portion?
Answer: The unvested options are forfeited and returned to the plan reserve
Upon voluntary resignation, unvested awards are typically forfeited per plan terms and the shares revert to the plan reserve.
Which plan design feature is most directly intended to align long-term executive interests with shareholder value creation?
Answer: Setting performance goals tied to multi-year total shareholder return (TSR)
Multi-year TSR-based performance goals directly tie payout to the stock price outcome experienced by shareholders over the same period.