New Mexico Employee Stock Purchase Plan
Description
How to fill out Employee Stock Purchase Plan?
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FAQ
A leveraged employee stock ownership plan (LESOP) uses borrowed money to fund an ESOP as a form of equity compensation for employees. The company borrows against its assets and then repays the loan used to fund the ESOP via annual contributions.
The term employee stock option (ESO) refers to a type of equity compensation granted by companies to their employees and executives. Rather than granting shares of stock directly, the company gives derivative options on the stock instead.
The most notable difference between an ESOP vs ESPP is in how the employee receives the stock and when they can sell the stock. ESOPs provide the stock or shares at no cost to employees. ESPPs require participants to contribute funds to purchase shares of stock, though at a discounted rate.
ESOPs are expensive to set up, and expensive to maintain as an appraisal is required annually to stay in compliance. If the cash flow dedicated to the ESOP will greatly limit the cash available to reinvest in the business over the long-term, an ESOP is unlikely to be a good fit.
The standard stock option plan grants your employee a stock option that invests over four years. After the first year, there's a cliff?they don't own anything for their first 12 months, but after their first year, they invest in 25% of all the options you give them.
ESOPs are designed for prolonged, sustained growth by a business, and for a business that intends to operate for 10, 20, or more years into the future. An Equity Incentive Plan, in contrast, is geared more toward a change of control and exit from the business by service provider employees in 3-5 years (or less).
Your ESPP will have set offering and purchase periods, while a stock option grant has a set term in which you can exercise the options after they vest. The purchase price of stock under a tax-qualified Section 423 ESPP is typically discounted in some way from the market price at purchase.
With stock-based compensation, employees in an early-stage business are offered stock options in addition to their salaries. The percentage of a company's shares reserved for stock options will typically vary from 5% to 15% and sometimes go up as high as 20%, depending on the development stage of the company.
There are two types of stock options: incentive stock options (ISOs) and non-qualified stock options (NSOs). These mainly differ by how and when they're taxed. ISOs could qualify for special tax treatment. With NSOs, you usually have to pay taxes both when you exercise and sell.
An ESPP is a program in which employees can purchase company stock at a discounted price. Income or loss from the sale of shares you purchased through an ESPP is generally taxed as a capital gain or loss, though there are holding period requirements.
