The Advisors' Blog

On this blog, we spend a lot of time discussing executive pay, but as our readers well know, a company’s broader employee population is often eligible for awards under the equity plan, and those awards can be deployed in a variety of ways. This Cooley memo discusses where “equity refresh grants” fit in that strategy – noting that they can be an important tool for boosting employee morale and supporting a company’s long-term performance.

The memo discusses strategies, design structures and timing, calculating refresh award values, and communicating with employees. Here’s what it says about forms of equity:

Refresh grants can take various forms depending on the type of company and its equity compensation strategy. Stock options, including both incentive stock options and nonqualified stock options, remain a common form of equity used for refresh grants, particularly at earlier and mid-stage private companies. Restricted stock units (RSUs) are increasingly popular among late-stage private companies, typically companies with a valuation at or above $1 billion. Some companies also use performance-based equity or other structures depending on their specific circumstances and objectives. The choice of equity vehicle for refresh grants often mirrors the type used for initial grants, though companies may adjust their approach as they mature or as market practices evolve.

The memo points out that equity refresh grants carry important tax and legal implications that both employers and employees should understand. On the securities and compliance front, it says:

[C]ompanies must ensure that refresh grants comply with the terms of their equity incentive plans, including any limits on the number of shares available for issuance. Securities law considerations, including registration requirements and exemptions, also apply to refresh grants just as they do to initial equity awards.

Keep in mind that when it comes to public company say-on-pay votes and executive pay, investors sometimes frown on retention awards. As discussed at our Executive Compensation Conference a couple weeks ago, there are factors that can mitigate that risks – and in some cases, the risks are also outweighed by the benefits.

Members can visit our “Equity Compensation Plans” Practice Area for additional resources on this topic.

– Liz Dunshee