Company liquidity events can be complex enough without getting lost in the terminology. Here, we define some common terms you may encounter as your company navigates a tender offer or initial public offering (IPO).
Blackout Period
A period during which you’re prohibited from trading public company stock, such as during quarterly earnings announcements, when the company is engaging in a major transaction (such as a merger or acquisition) and if you are in possession of material non-public information (MNPI).
Concentration Risk
A type of investment risk that may arise if a large portion of your net worth is tied up in a single company’s stock. In essence, it refers to an over-proportionate amount of your assets being “concentrated” in only one or very few holdings.
Cost Basis
The cost basis of any stock you own is the price you paid to acquire the shares. It determines how much you may need to report as taxable income when you sell your shares.
Employee Stock Purchase Plan (ESPP)
A company benefit that allows you to buy shares of your company’s stock through payroll deductions, usually at a discounted rate.
Equity Compensation
A broad term that refers to any type of equity awards you’ve been granted, such as restricted stock units (RSUs), restricted stock awards (RSAs), stock options and stock appreciation rights (SARs).
Exercise
Exercising options means buying shares of company stock at the grant price within a fixed time period. Before they’re exercised, options don’t give you an ownership right in shares of the company. Options are often subject to vesting requirements and generally cannot be exercised until the vesting period is complete.
Expiration Date
Options can only be exercised up to their expiration date. You can find this date in your company plan documents or award agreement. Options typically expire 10 years after the grant date or, for an employee who leaves the company, within a shorter period following termination of employment.
Fair Market Value (FMV)
For public companies, FMV is the value of a share of your company’s stock on the open market. For private companies, it’s what the value would be if the stock were available to trade on the open market and is typically based on the company’s latest 409A valuation.
Grant
Another term for an award of equity compensation. The “grant date” is the date on which the award is considered made.
Initial Public Offering (IPO)
A process by which a private company becomes listed on a stock exchange and begins offering shares to the public for the first time. This is sometimes called “going public”. Once your company is public, stock can be bought or sold on a public stock exchange.
Insider Trading
Buying or selling company shares while in possession of material non-public information (MNPI) is insider trading. Insider trading is illegal.
Liquidity Event
An event—such as an initial public offering (IPO), merger, acquisition or tender offer—that allows private company shareholders to convert their equity into cash.
Lock-up Period
The period immediately following an IPO during which employees are restricted from selling company shares.
Material Non-Public Information (MNPI)
Any information that has not been disclosed to the public and may have an impact on a public company’s stock price. It includes but is not limited to upcoming leadership changes, upcoming acquisitions or divestments, upcoming product launches or insights about product performance, earnings or forecasts, and legal or regulatory issues.
Open Trading Windows
Periods when employees are permitted to trade in public company stock. They usually take place four to six weeks after each quarterly earnings release.
Oversubscription
If a tender offer is oversubscribed, that means people want to sell more shares than the buyer can accept. If that happens, your participation may be prorated and you may not be able to sell all the stock you want to.
Restricted Stock Awards (RSAs)
An award of company shares subject to transfer restrictions and a substantial risk of forfeiture until certain vesting conditions are met. You may not transfer, sell or otherwise dispose of the shares until they are no longer subject to transfer restrictions (typically, when a vesting event occurs). They are also subject to a substantial risk of forfeiture until certain vesting targets are met, such as employment length or stock performance.
Restricted Stock Units (RSUs)
A promise to deliver shares of company stock to the holder on a specified event or date. If permitted by the plan, an award of RSUs may entitle you to stock or cash (with a value equal to the number of units awarded) upon vest.
Strike Price
The strike price of a stock option, also known as its “exercise price” or “grant price”, is the predetermined price at which you can buy one share of your company’s stock. This is typically the fair market value of the stock on the day the option is granted, but your plan documents will provide details applicable to your awards.
Stock Appreciation Rights (SARs)
An equity award that gives you a right to receive a payment in cash or shares of a value equal to the appreciation in the company’s stock from the date of grant to the date of exercise. SARs gain value if your company’s stock rises. They must usually be exercised during a specific term, after which they expire.
Stock Options
The right, but not the obligation, to buy a company’s stock at a fixed price during a fixed period of time. When the company’s stock price rises above the grant or exercise price, the award is “in the money.” When the stock price drops below the grant or exercise price, the award is “underwater”. The primary difference between the two types of stock options—non-qualified stock options (NQSOs) and incentive stock options (ISOs) —lies in their federal tax treatment.
Tender Offer
A type of liquidity event that allows private company shareholders to sell their shares back to their company or to an outside investor at a set price.
Vesting Period
The required period during which stock options must be held before they can be exercised. Vesting criteria may be time- and/or performance-based and vary depending on the details of your company’s plan.
Vesting Schedule
Many equity compensation plans include multiple vesting events, which are set out in a vesting schedule.
Do you have more questions about navigating your company’s tender offer or IPO? If so, Morgan Stanley is here to help. Contact us today to speak to one of our Financial Advisors.