What is a stock grant? Definition & how it works

By compensating with stocks, the employer aims to motivate employees to stay at the company and keep them invested in its ongoing success, strengthening the pay-to-performance link, which research shows jumped almost tenfold for CEOs from 1980 to the late 1990s due to the proliferation of stock options.

How do stock grants work?

Stock grants work by giving employees actual company shares as compensation, either alongside or instead of cash payments. Here's the basic process: companies issue shares directly to workers, creating immediate ownership once conditions are met. This practice is especially common with startups looking to attract talent without large cash outlays and is part of a broader trend where, by 2001, equity-based pay constituted about two-thirds of the median annual total pay for U.S. top executives.

Looking to reward your global team? Offer salary, equity, and benefits confidently with Oyster.

Most stock grants include these key restrictions:

• Vesting periods: Typically 1-2 years before you fully own the shares, though some agreements use Cliff vesting, where 100% of shares vest at once after a longer period, such as five years.

• Stay requirements: Leave early, lose unvested stock

• Service timing: Only granted for work already completed

Are stock grants worth it?

So, are stock grants actually worth it? The answer depends on two key factors:

• Company performance: If the business grows, your shares grow in value

• Personal alignment: You become invested in the company's success

For employers, it's a win-win—motivate your team without draining cash reserves.

Stock grant vs. stock option

What's the difference between stock grants and options? Here's the key distinction:

• Stock grants: Free shares given directly to you

• Stock options: The right to buy shares at a set price

With grants, you own the stock once it vests—which is why an executive might value it at 80% to 90% of its cash value. With options, you still need to pay to actually get the shares, leading to a lower perceived value.

The idea behind both practices is to motivate your employees to work harder for your company. Employees who receive stock grants or options may be willing to put more effort into their work since they stand to gain from company stock price increases. For the employer, providing stock grants or options to employees offers the additional benefit of not requiring a cash outlay upfront.

How are stock grants taxed?

Here's what you need to know about stock grant taxes: Yes, they count as income, but timing matters. You don't pay taxes when you receive the grant—you pay when the shares vest.

Once vested, report the current market value as taxable income for that year.

Issuing stock grants also has tax ramifications for the employer. Companies that issue stock grants to employees may be able to claim a corporate tax deduction. To claim the deduction, U.S. employers must report the value of the stock grants on IRS Form W-2 or Form 1099. On the employee side, after exercising an incentive stock option, you should receive from your employer a Form 3921.

Creating a stock grant agreement

Every stock grant needs a formal agreement, and in some cases, the SEC requires public companies to file any equity compensation plan with them. This agreement covers:

• Grant details: Number of shares and vesting schedule

• Special terms: Non-compete clauses or performance requirements

• Conditions: What happens if employment ends

The employee receiving the stock agreement should read it carefully and decide whether to accept the stock grant. They should sign and return the stock grant agreement if they accept the terms.

Offering stock grants to foreign employees

You can also include your foreign employees when compensating your team with stock grants. Generally, U.S. companies can issue stock grants to foreign workers. But first, be sure to check local laws and regulations for any restrictions. Keep in mind that tax laws vary significantly from place to place. What's advantageous for your tax bill in one location may not be beneficial in another.

Simplify global equity compensation with Oyster

Stock grants are a powerful way to reward your team and build a culture of ownership, no matter where your employees live. But managing equity across different countries introduces layers of tax and legal complexity. Oyster's global employment platform helps you navigate these challenges, making it easier to offer competitive, compliant rewards to your entire team.

When you're ready to build a truly global team, you can Start hiring globally with a partner who understands the nuances of international compensation.

FAQs

Are stock grants worth it?

Stock grants can be valuable if the company grows, as your shares increase in value alongside business success.

Do stock grants count as income?

Yes, but only when they vest—at which point you'll report their market value as taxable income.

What is the difference between a stock grant and an RSU?

Stock grants and RSUs are essentially the same—both give you actual shares after vesting, unlike stock options which only give you the right to purchase shares.

Disclaimer: This article and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.