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2. Understanding basic ESOP terms
Robert Capla avatar
Written by Robert Capla
Updated over a year ago

When navigating through the world of growth participation plans, such as Phantom Stock Plans and Stock Options, it's essential to understand some basic terms. Let's break these down into simpler language:

Assets (e.g. Phantom Shares, Stock Options, etc.)

These are rights given to an employee to benefit from the increase in the company's stock value without owning the actual stock. In a Phantom Stock Plan, you receive phantom shares, which mirror the value and potential growth of the company's actual shares. In a Stock Option plan, you're granted options to buy company shares at a set price in the future.

Eligibility

Eligibility refers to the criteria you need to meet to participate in the ESOP. For instance, you might need to work for the company for a certain period or work a certain number of hours each year to be eligible.

Exercise price (for Stock Options)

In the context of stock options, the exercise price is the fixed price at which you can buy the company's shares in the future. This price is set on the grant date and doesn't change, even if the actual share price increases or decreases.

Expiration date

This is the last date on which you can benefit from your growth participation plan. For stock options, it's the last day you can exercise your options. For phantom shares, it's typically the last day before the shares disappear or are automatically paid out.

Fair market value

This is the current value of a company's actual share in the open market. It helps determine the value of your phantom shares or the potential payout from your stock options.

Grant date

This is the date on which your company gives you the phantom shares or stock options. It's important because it often starts the clock for other key aspects of your plan, like vesting.

Payout

The payout is the money you receive when your phantom shares or stock options are converted to cash. With phantom shares, the payout is usually equal to the increase in the company's share price since the grant date. With stock options, the payout is the difference between the current share price and your exercise price if the share price is higher.

Vesting

Vesting refers to the period you need to wait to fully gain the rights to your phantom shares or stock options. This period, determined by your company, encourages employee loyalty and long-term commitment.

By understanding these terms, you're well on your way to becoming an ESOP pro! But remember, every company's ESOP is a little bit different, so always refer to your specific plan document or ask your HR department if you have any questions.

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