USA Law and Practice Contributed by: D. Scott Bennett, Nicholas A. Dorsey, Virginia M. Anderson and Ellen H. Park, Cravath, Swaine & Moore LLP
veterans, minorities, women, or people with dis - abilities. New York, for example, has the Minor - ity- and Women-Owned Business Enterprise Program for businesses owned by women and/ or minorities in New York State, and prioritises these businesses for state procurement. Other programmes prioritise specific industries. Gov - ernment endorsement programmes are the sub - ject of current political attention.
RSUs, which are contractual rights to receive/ purchase shares upon vesting. Stock Options A stock option is a contractual right to purchase stock via payment of an exercise price, which is equal to the fair market value (FMV) of the underlying shares at the time of grant upon vesting. Stock options are generally granted to employees slightly later in the company’s devel - opment than restricted stock. Companies often issue incentive stock options (ISOs) but may also issue non-qualified stock options (NQSOs) (see 5.3 Taxation of Instruments ). Restricted Stock Units An RSU is a contractual right to receive stock upon vesting without payment of an exercise price or otherwise. RSUs are generally awarded to employees later in the company’s life cycle when the company’s valuation has risen or to address dilution concerns. Phantom Equity Phantom equity is a contractual right to receive cash tied to the performance of the company’s stock. Phantom equity is generally awarded only in unique situations. Profits Interests A profits interest is an equity-like.interest in the future profits and capital appreciation of a com - pany. It is granted to founders and key employ - ees in companies structured as partnerships or limited liability companies. Economically, profits interests function similarly to stock options. 5.3 Taxation of Instruments When deciding among equity award alternatives, a growth company must consider the tax con - sequences for employees, including the amount, character (whether ordinary or capital) and tim -
5. Employment Incentives 5.1 General
Growth companies in the USA seek to encour - age the long-term commitment of founders and key employees through the issuance of equity awards. Equity awards incentivise employees to remain with the company long enough for their awards to vest and to work diligently to ensure maximum value upon settlement. 5.2 Securities Equity awards are generally issued with vesting conditions based on the passage of time (usu - ally three to four years, often with a one-year “cliff” and monthly or quarterly vesting thereaf - ter) and, in some cases, the achievement of Key Performance Indicators. Typical forms of equity awards in the USA include restricted stock, stock options and restricted stock units (RSUs). Growth companies may also award phantom equity and profits interests. Restricted Stock Restricted stock is actual stock subject to vest - ing conditions – the non-satisfaction of which results in forfeiture of the stock. Restricted stock is generally granted to founders and key employ - ees at the start of a company’s development. Restricted stock differs from stock options and
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