Equity Glossary

Every stock option and equity compensation term explained in plain language. 20 terms and counting.

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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

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.

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.

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.

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.

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.

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.

Exercise Price

The fixed price per share at which an option holder can purchase company stock, set at the time the option is granted.

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.

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.

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.

N

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.

P

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.

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.

R

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.

S

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.

V

Vesting Schedule

The timeline over which an employee earns the right to exercise stock options or receive shares, typically spanning four years with incremental vesting.