Equity Comp: Don't Just Hope

Equity compensation, particularly in the tech sector, often includes stock options, restricted stock units (RSUs), and employee stock purchase plans (ESPPs). These provide employees with ownership in the company, aligning their interests with its long-term success. Stock options grant employees the right to purchase shares at a predetermined price (the strike price) after a vesting period, offering potential financial gains if the stock value increases. RSUs, on the other hand, are a promise to grant shares or equivalent value in the future, subject to vesting. ESPPs allow employees to buy shares, often at a discount. Vesting schedules are common with equity compensation, requiring employees to stay with the company for a certain period before claiming their equity. A typical vesting schedule is three to five years with a one-year "cliff," meaning 25% of the options vest after one year, and the remaining options vest monthly or quarterly. Some companies use "double-trigger" vesting, where vesting accelerates upon a change of control (like an acquisition) followed by termination. Tax implications for equity compensation in Canada vary depending on the type of award. For stock options, employees are taxed on the difference between the market value at exercise and the strike price, with a potential 50% deduction if certain conditions are met. RSUs are taxed as income when the units vest and shares are delivered. Capital gains taxes apply when shares are sold at a higher price. Effective July 1, 2021, the 50% deduction for stock options is limited to an annual cap of $200,000 for non-CCPCs (Canadian-controlled private corporations) with global revenue of CAD 500 million or more.