Equity Glossary
Every stock option and equity compensation term explained in plain language. 80 terms and counting.
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10b5-1 Trading Plan
A pre-arranged stock trading plan that allows corporate insiders to sell shares on a predetermined schedule, providing an affirmative defense against insider trading allegations.
409A Valuation
An independent appraisal of the fair market value of a private company's common stock, required by Section 409A of the Internal Revenue Code.
83(b) Election
A tax filing with the IRS that allows an individual to pay taxes on the fair market value of restricted stock at the time of grant rather than at vesting, potentially reducing future tax liability.
A
Acceleration Clause
A provision in a stock option or equity agreement that allows some or all unvested shares to vest immediately upon the occurrence of a specified triggering event, such as an acquisition or termination.
Alternative Minimum Tax
A parallel federal tax system that ensures high-income taxpayers pay a minimum level of tax, often triggered by exercising incentive stock options.
AMT Credit Carryforward
A tax credit generated when you pay Alternative Minimum Tax that can be carried forward to reduce your regular tax liability in future years, effectively recovering the AMT over time.
Anti-Dilution Provisions
Contractual protections in preferred stock agreements that adjust the conversion price to protect investors from ownership dilution in down rounds or below-market share issuances.
B
Bargain Element
The difference between the fair market value of a stock and the exercise price of an option at the time of exercise.
Black-Scholes Valuation
A mathematical model used to estimate the theoretical fair value of stock options based on variables including stock price, strike price, time to expiration, volatility, and risk-free interest rate.
Blackout Period
A company-imposed restriction during which employees and insiders are prohibited from trading company stock, typically occurring around earnings announcements, major corporate events, or IPO lock-up periods.
C
Cap Table
A capitalization table that records all of a company's securities, including shares, options, warrants, and convertible instruments, along with who owns them and at what terms.
Cashless Exercise
A method of exercising stock options where shares are immediately sold to cover the exercise cost and associated taxes, requiring no upfront cash from the option holder.
Change of Control
A corporate event, typically an acquisition or merger, that triggers specific provisions in equity agreements such as acceleration clauses and golden parachute rules.
Clawback Provisions
Contractual terms that allow a company to reclaim previously paid equity compensation or exercise proceeds under specific circumstances such as termination for cause or financial restatements.
Cliff Vesting
A vesting structure where no equity vests until a specified period has passed, at which point a large initial portion vests all at once.
Common Stock
The standard class of equity ownership in a corporation, typically held by founders, employees, and early stakeholders, that represents residual claim on assets after all preferred stockholders are paid.
Constructive Receipt
A tax doctrine stating that income is taxable when it is made available to the taxpayer without substantial restrictions, regardless of whether the taxpayer actually takes possession.
Cost Basis
The original value of an asset for tax purposes, typically the price paid plus any recognized income, used to calculate capital gains or losses upon sale.
D
Dilution
The reduction in an existing shareholder's ownership percentage that occurs when a company issues new shares, typically through fundraising rounds or employee equity grants.
Discount for Lack of Marketability (DLOM)
A reduction applied to the valuation of private company shares to reflect the inability to readily sell them on a public market, typically ranging from 15% to 35%.
Disqualifying Disposition
A sale or transfer of shares acquired through incentive stock option exercise that fails to meet the required holding periods, causing the gain to be taxed as ordinary income rather than long-term capital gains.
Double-Trigger Acceleration
An equity acceleration provision that requires two events to occur before unvested shares vest immediately: first, a change of control (such as an acquisition), and second, the employee's involuntary termination within a specified period after the change of control.
Down Round
A funding round in which a company raises capital at a lower valuation than its previous round, resulting in dilution of existing shareholders and often triggering anti-dilution protections for preferred stockholders.
Drag-Along Rights
A contractual provision that allows majority shareholders (typically preferred stockholders) to force minority shareholders to join in the sale of the company on the same terms, ensuring a clean exit without holdouts.
E
Early Exercise
The ability to exercise stock options before they have vested, typically combined with an 83(b) election to gain potential tax advantages.
Employee Stock Purchase Plan (ESPP)
A company-sponsored benefit allowing employees to purchase company stock at a discount, typically 15%, through payroll deductions during defined offering periods.
Estimated Tax Payments
Quarterly tax payments made to the IRS and state tax authorities to cover income tax liability on income not subject to withholding, such as gains from exercising stock options.
Exercise Price
The fixed price per share at which an option holder can purchase company stock, set at the time the option is granted.
Exercise Window
The period of time during which a stock option holder is permitted to exercise their vested options, including both the active employment period and any post-termination exercise period.
F
Fair Market Value
The estimated price at which a company's stock would change hands between a willing buyer and a willing seller, each having reasonable knowledge of the relevant facts.
Form 3921
An IRS information return that employers must file when an employee exercises incentive stock options, reporting the exercise date, grant date, exercise price, and fair market value.
Form 3922
An IRS information return filed by employers when employees acquire stock through an Employee Stock Purchase Plan, reporting key transaction details needed for tax calculations.
Fully Diluted Shares
The total number of company shares that would be outstanding if all convertible securities — options, warrants, convertible notes, and RSUs — were exercised or converted.
G
Golden Handcuffs
Financial incentives, often including unvested stock options or equity, designed to encourage employees to remain with a company for a specified period.
Grant Date
The date on which a company officially awards stock options to an employee, establishing the strike price, vesting schedule, and the start of key holding periods for tax purposes.
I
Incentive Stock Options
A type of employee stock option that qualifies for special tax treatment under the Internal Revenue Code, potentially allowing gains to be taxed at long-term capital gains rates.
IPO Lock-Up Period
A contractual restriction, typically lasting 90 to 180 days after a company's initial public offering, during which insiders — including employees holding exercised stock options — are prohibited from selling their shares.
L
Liquidation Preference
A contractual right attached to preferred stock that determines the order and amount in which investors are paid before common stockholders in an exit event such as an acquisition, merger, or liquidation.
Liquidity Event
A corporate transaction that allows shareholders to convert their equity into cash, most commonly through an initial public offering (IPO), acquisition, merger, or direct listing.
Long-Term Capital Gains
Profits from the sale of assets held for more than one year, taxed at preferential federal rates of 0%, 15%, or 20% — significantly lower than ordinary income tax rates.
N
Net Exercise
A method of exercising stock options in which the company withholds a portion of the shares being exercised to cover the exercise cost, delivering only the net shares to the employee without requiring any cash outlay.
Net Investment Income Tax
A 3.8% federal surtax on investment income — including capital gains, dividends, and interest — that applies to individuals with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly).
Non-Qualified Stock Options
A type of stock option that does not qualify for special tax treatment, with the bargain element taxed as ordinary income at the time of exercise.
Non-Recourse Financing
A type of loan used to fund stock option exercises where the lender's only recourse in case of default is the underlying shares, protecting the borrower's personal assets.
O
Option Pool
A block of shares reserved by a company for future issuance to employees, advisors, and consultants through stock option grants, typically established before or during a financing round.
Ordinary Income
Income taxed at regular federal and state income tax rates, including wages, salaries, and — in the context of stock options — the spread on non-qualified stock options at exercise and disqualifying dispositions of incentive stock options.
P
Performance Stock Units (PSUs)
A form of equity compensation where shares are granted contingent on achieving specified performance milestones, such as revenue targets or stock price thresholds.
Phantom Stock
A deferred compensation arrangement that pays employees a cash bonus equal to the value of a set number of company shares, providing equity-like upside without actual share ownership.
Post-Termination Exercise Period
The window of time after leaving a company during which a former employee can exercise their vested stock options before they expire.
Preferred Stock
A class of equity ownership typically held by venture capital investors that carries special rights including liquidation preferences, anti-dilution protections, and conversion rights that rank above common stock.
Prepaid Variable Forward Contract
A financial agreement in which a stockholder receives an upfront cash payment in exchange for a commitment to deliver a variable number of shares at a future date, allowing liquidity while deferring the taxable gain.
Pro-Rata Rights
An investor's contractual right to participate in future funding rounds to maintain their ownership percentage, preventing dilution from new share issuances.
Profit Interest
An equity award in a limited liability company (LLC) that entitles the holder to a share of future profits and appreciation above a specified threshold, commonly used as equity compensation at LLC-structured companies.
Q
QSBS (Section 1202)
A federal tax provision that allows eligible shareholders to exclude up to 100% of capital gains from the sale of qualified small business stock held for more than five years.
Qualified Domestic Relations Order (QDRO)
A court order issued during divorce proceedings that divides retirement plan benefits and can apply to the division of stock options and equity compensation between spouses.
R
Refresher Grants
Additional stock option or equity grants awarded to existing employees after their initial hire grant, typically given annually or at promotion milestones to maintain retention incentives and offset dilution.
Repurchase Rights
A contractual right that allows a company to buy back shares from an employee — typically at the original exercise price — if the shares have not yet vested at the time the employee leaves the company.
Restricted Stock
Company shares granted or sold to an employee that are subject to vesting restrictions and a company repurchase right until they vest.
Restricted Stock Units
A form of equity compensation where a company promises to deliver shares of stock to an employee upon the satisfaction of vesting conditions.
Reverse Stock Split
A corporate action that consolidates multiple existing shares into fewer shares, proportionally increasing the price per share, often used to meet exchange listing requirements.
Right of First Refusal (ROFR)
A contractual right that gives the company or existing shareholders the opportunity to purchase shares before the holder can sell them to a third party.
Rule 144
An SEC regulation that restricts the resale of restricted and control securities, requiring specific holding periods and volume limitations before shares can be sold on the public market.
S
Secondary Market
A marketplace where existing shareholders of private companies can sell their shares to qualified buyers before an IPO or acquisition, providing early liquidity without a traditional exit event.
Section 1045 Rollover
A tax provision allowing shareholders to defer capital gains by rolling proceeds from the sale of QSBS held for more than six months into replacement QSBS within 60 days.
Section 280G (Golden Parachute)
A tax provision that imposes a 20% excise tax on excess parachute payments — compensation linked to a change of control that exceeds three times an executive's base compensation.
Section 409A Penalties
Severe tax penalties — including a 20% additional tax plus interest — imposed when deferred compensation arrangements, including mispriced stock options, fail to comply with Section 409A regulations.
Sell-to-Cover
A method of exercising stock options or settling RSU vests in which a portion of the shares are immediately sold on the open market to cover the exercise cost and tax withholding, with the remaining shares delivered to the employee.
Short-Term Capital Gains
Gains from the sale of assets held for one year or less, taxed at ordinary income rates rather than the preferential long-term capital gains rates.
Single-Trigger Acceleration
An equity acceleration provision that causes unvested stock options or shares to vest immediately upon a single event — typically a change of control such as an acquisition — regardless of whether the employee continues working at the acquiring company.
Spread
The difference between the current fair market value of a share and the exercise (strike) price of the stock option, representing the built-in gain at the time of exercise.
Stock Appreciation Rights
A form of equity compensation that gives the holder the right to receive cash or stock equal to the appreciation in the company's stock price over a base price, without requiring the purchase of actual shares.
Stock Option Grant
A company's formal award of stock options to an employee, specifying the number of shares, exercise price, vesting schedule, and other key terms.
Stock Split
A corporate action that increases the number of outstanding shares by dividing each existing share into multiple shares, proportionally reducing the price per share without changing total market value.
Strike Price
The fixed price at which an employee can purchase shares of company stock under a stock option agreement, set at the time the option is granted.
Supplemental Income Tax Rate
The flat federal withholding rate of 22% (or 37% above $1 million) applied to supplemental wages including stock option exercise income and RSU vesting income.
T
Tag-Along Rights
A contractual right that allows minority shareholders to join a transaction when a majority shareholder sells their stake, ensuring they receive the same price and terms.
Tax Withholding (Equity)
The mandatory income and payroll taxes that employers withhold when equity compensation events create taxable income, such as NSO exercises, RSU vesting, or ESPP disqualifying dispositions.
Tender Offer
A structured offer by a company or third party to purchase shares from existing shareholders at a specified price, providing a controlled liquidity opportunity for employees of private companies before an IPO or acquisition.