Types of Shares for Employees in a Private Company

When it comes to incentive compensation in a private company, employees have a variety of share types available to them. These different types of shares are designed to align the interests of the employees with those of the company’s founders and other stakeholders. In this article, we explore the most common types of shares employees can receive in a private setting.

Restricted Common Stock

Restricted Common Stock is a form of equity ownership granted to employees in a private company. Unlike publicly traded shares, these shares come with certain restrictions. The primary restriction is the inability to transfer ownership, meaning the shares cannot be sold or transferred to another party until certain conditions are met. This restriction helps ensure the stability of the company and prevents the shares from flooding the market.

Another common restriction is the right to vote. In some cases, the company may issue two classes of common stock: Class A and Class B. Class A shares generally have voting rights and controls over significant decisions, while Class B shares do not. However, Class B shares often have economic benefits and can also come with transfer privileges. This setup is often seen in companies where venture capital (VC) investors have invested, and they prefer to retain control over key decisions.

Restricted Stock Units (RSUs)

Restricted Stock Units (RSUs) are another form of equity compensation that aligns with the employee's performance and the company’s growth. These units represent the right to receive company stock in the future, which means that the actual stock is not issued until the units vest. Vesting is a period during which the employee is entitled to receive the stock, based on vesting schedules and other conditions.

Unlike restricted common stock, RSUs do not confer immediate ownership or voting rights. Instead, employees must wait for the shares to vest before they can benefit from them. This allows the company to delay the tax obligations until the shares are actually received. Once the RSUs vest, the employee can choose to keep the stock, sell it, or use it as part of a broader compensation package.

Significance of Share Types for Employees

The type of share an employee receives can significantly impact their financial situation, future career prospects, and overall compensation. Restricted common stock and RSUs provide employees with valuable ownership stakes in the company while mitigating potential risks and obligations. By aligning the employee’s personal financial interests with the company’s success, these share types incentivize employees to work towards the long-term growth and stability of the company.

For instance, employees with restricted common stock or RSUs may need to consider the timing of exercising these shares or selling them. This consideration is influenced by the company's performance, market conditions, and personal financial needs. Proper planning can help employees maximize their long-term benefits and minimize potential tax burdens.

Conclusion

In a private company, employees can receive various types of shares that serve different purposes. Understanding the nuances between restricted common stock, RSUs, and other share types is crucial for making informed decisions about incentives and future career opportunities. By aligning these incentives with the company’s objectives, employees can contribute more effectively and achieve mutual success in the long run.