TLDR
Check out our list of important terms you should know if you have equity in a private company.
Below is a non-exhaustive list of terms you should know if you have equity in a private company.
Stock (Share): Having a share of stock means you're a shareholder in a company. You own a piece of that business and have the potential to earn a share of its profits and growth.
Common Stock: shares that are typically given to employees to align their interests with the future success of the company.
Preferred Stock: shares that are typically sold to investors in order for the company to raise money for its operations.
Stock Option: An option is the right to purchase a share of the company’s stock at a set price.
Exercise: exercising a stock option simply means you will receive a share of the company’s stock by purchasing it at your set strike price.
Strike Price: this is the price at which an option holder has the right to purchase shares of their company’s stock.
FMV: this is the current Fair Market Value (hence FMV) of one share of a company’s common stock.
Vesting: a time-based schedule that outlines how many options or shares an employee earns based on the length of their employment.
ISO: Incentive Stock Options are a type of stock option granted to current full time employees. ISO’s have favorable tax treatment via AMT, but they expire 90 days after termination of employment.
NSO: Non-Qualified Stock Options are another type of stock option that companies can grant to anyone (employees, contractors etc). NSO’s are taxed as regular income at exercise, but their expiration date can be extended up to 10 years from the date they are granted.
RSU: Restricted Stock Units are another type of equity compensation. As opposed to stock options, RSUs simply turn into shares without the need for exercise once they vest. RSUs are taxed as they turn into shares, but typically feature both time-based and exit-based vesting schedules.
AMT: Alternative Minimum Tax is the special rate applied to ISO exercises: either 26% or 28%.
Secondary Sale: the secondary market is a place where private shares can be bought and sold.
Tender (Buyback): when companies or investors offer to buy shares from shareholders at a certain price.
IPO: an Initial Public Offering is when a private company lists its shares for sale on the public markets for the first time. This allows private shareholders to sell their stock after a 6 month IPO lockup.
M&A: Mergers & Acquisitions are when one company either combine with or purchase another company. This typically leads to liquidity for shareholders.
We will continue to update this list periodically but please reach out to jordan@esofund.com if you have any questions or suggestions of important terms to add.
If you need help funding your stock option exercise, contact ESO Fund using the contract form below.
