What is a virtual stock option plan (VSOP)?

Many companies offer employees stock options (essentially partial ownership of the company) as part of their compensation package. However, many startups offer virtual stock options as an alternative.

A virtual stock option plan (VSOP) guarantees that an employee will receive a cash payout at a designated time or when a specific event occurs in the future. The IRS considers these plans a form of non-qualified deferred compensation where an employee has a legally binding right to a future cash payment tied to the value of company shares. The payment amount depends on how much virtual stock the employee owns and the value of the stock at the time of payment—some virtual shares are worth only a portion of a traditional share.

In a VSOP, you're not an actual shareholder—your "ownership" exists on paper only. You won't get voting rights, attend shareholder meetings, or receive dividends.

Companies set their own program rules for who qualifies and how many options they offer. Key factors that influence share offerings include:

• Job role

• Job category

• Seniority

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How does a virtual stock option plan work?

A virtual stock option plan (VSOP) is a cash bonus program tied to company stock performance—you receive money, not actual shares. Unlike traditional stock options, you don't buy or hold real equity.

The process typically follows a few key steps:

• Grant: The company awards you a specific number of virtual stock options (VSOs).

• Vesting: You must remain with the company for a set period, known as the vesting period, before you have a right to the value of your VSOs. For example, one company's SEC filing specifies that awards vest on the fifth anniversary of the grant date or earlier in cases of a change of control, death, or disability. Many plans include a "cliff," a minimum time you must work (often one year) before any options begin to vest.

• Payout Event: The plan defines a specific trigger for payment. This is often a liquidity event like an acquisition, an IPO, or a designated date.

• Cash Settlement: When the payout event occurs, the company calculates the value of your vested VSOs based on the company's current valuation and pays you the amount in cash, minus any applicable taxes.

Why do companies offer virtual stock option plans?

So, what's the point of a virtual stock option program? It aligns company and employee interests by tying your cash payout to stock performance. When the company does well, your payout increases—giving you real incentive to help drive results.

Although employees are the most common participants in virtual stock programs, some companies extend the option to third-party vendors, investors, directors, and others. This is most common in startups.

Virtual stock options vs. traditional stock options

It's easy to confuse virtual stock options with their traditional counterparts, but they serve different purposes. The main distinction comes down to ownership.

Virtual Stock Option Plans (VSOPs):

• Payment type: Cash bonus based on stock performance

• Ownership: No actual equity or voting rights

• Cost to you: Nothing—no exercise price

Traditional Stock Options:

• Payment type: Right to buy shares at a set price

• Ownership: Real equity and potential voting rights

• Cost to you: Must pay exercise price to own shares

What do employees need to know about virtual stock option plans?

Most virtual stock programs have specific requirements before you can collect payment. The main requirement is vesting—working for the company for a set period.

Key requirements typically include:

• Vesting period: Usually 1-4 years of employment

• Performance targets: Meeting defined company or individual goals

• Employment status: Remaining with the company through the cliff period

The period when employees can't collect their virtual stock options is known as the cliff. During this period, if the employee leaves the company for any reason, they forfeit their VSOs. Once vested, depending on program policy, employees may receive their allotment of VSOs or a portion, with more added annually, until they reach the cap.

There are tax implications to participating in a virtual stock option plan. Although the initial grant of virtual stock is not subject to taxation, the payout is taxed as regular income. According to the IRS, the fair market value of phantom stock is considered wages when it vests, and any subsequent appreciation is treated as income subject to FITW (Federal Income Tax Withholding) upon payout. In some cases, the value of the stock is taxed when the employee becomes vested if the virtual stock is tied to the value of the actual stock. Usually, these stocks do not earn dividends, but the standard tax code applies if they do.

What do employers need to know about virtual stock option plans?

From an accounting perspective, VSOPs are treated as deferred compensation. This creates some balance sheet considerations:

• Annual adjustments: Liability changes as stock value fluctuates

• Balance sheet impact: Can make the company appear more indebted because accounting standards require a cash-settled award to be classified as a liability.

• Reality check: The appearance is usually worse than the actual financial impact

Companies need to have provisions for when vested employees make a claim.

Clear and detailed record-keeping is critical to a successful VSOP. Startups looking for investors or considering a sale need accurate records of who has virtual shares, how many, and the promised payments to avoid the uncertainty that could drive away potential investors, partners, or buyers.

Simplify global rewards with Oyster

Virtual stock option plans can be a powerful tool for motivating a distributed team, aligning everyone toward a common goal without the legal complexities of cross-border equity. But it's just one piece of the puzzle. To truly attract and retain top talent worldwide, you need a holistic rewards strategy.

Oyster's Total Rewards solutions help you design and deliver competitive, compliant compensation and benefits tailored to each country. From salary benchmarking to localized benefits packages, we make it easy to care for your team, no matter where they live. Start hiring globally and build a compensation strategy that scales with your business.

FAQs

Are virtual stock options real equity?

No, virtual stock options are cash bonuses tied to stock performance, not actual ownership.

How are virtual stock options taxed?

VSOP payouts are taxed as ordinary income when received, but the initial grant is not taxable.

Do I get voting rights with a virtual stock option plan?

No, virtual stock options don't include voting rights or other shareholder privileges.

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.