The 10 Forms of Equity Incentives and Their Design Schemes

Meaning: A stock grant plan awarded based on the achievement of pre-determined internal or external performance targets. Recipients must meet these targets within a specified period (typically three to five years) to become eligible for the granted shares. Characteristics: Integrates performance targets with stock price appreciation and dividends. 3. Restricted Stock Award (RSA) English: Restricted Stock Award Meaning: A stock award granted by an employer to an employee, where the employee’s rights to the shares are subject to certain restrictions and may be forfeited. Characteristics: (1) Time-bound—helps retain employees to some extent. Restrictions include service periods or requirements to maintain the employment relationship; prior to the lapse of such restrictions, employees may not pledge, sell, or transfer the shares. However, they retain dividend rights and voting rights during the restricted period. Once restrictions lapse, employees receive fully unrestricted shares and gain full rights to pledge, sell, or transfer them. Failure to comply with the restrictions results in forfeiture of the corresponding shares. (2) Compared with Restricted Stock Units (RSUs), RSA involves granting actual shares upfront. 4. Restricted Stock Unit (RSU) English: Restricted Stock Unit Meaning: An agreement to issue potential shares upon grant, with actual share issuance occurring only when the employee satisfies the conditions stipulated in the grant plan. Characteristics: A commitment to deliver shares at a future date—e.g., shares will be issued three years later. 5. Performance-Accelerated Restricted Stock Award Plan (PARSAP) English: Performance Accelerated Restricted Stock Award Plan Meaning: Emerging alongside traditional time-based restricted stock awards is a performance-based grant approach, commonly termed the 'Performance-Accelerated Restricted Stock Award Plan.' Under this plan, the vesting period may extend up to 10 years instead of the typical three years, thereby enhancing talent retention. Characteristics: Longer vesting periods reinforce the incentive effect tied to pre-defined performance criteria. 6. Stock Appreciation Right (SAR) English: Stock Appreciation Right Meaning: A long-term incentive instrument whereby the company grants executives the right to receive a cash or stock award equal to the future appreciation in the company’s stock price. Characteristics: No purchase or issuance of actual shares is required; participants benefit directly from stock price appreciation. 7. Phantom Stock English: Phantom Stock Meaning: A compensation arrangement granted to executives, tied to the registered value, fair market value, or formula-determined value of the company’s shares. Characteristics: Participants do not hold actual shares and generally lack voting rights, but are entitled to cash dividends or equivalent payments. 8. Performance Unit Plan (PUP) English: Performance Unit Plan Meaning: An incentive plan under which employees must achieve pre-specified internal or external performance targets within a defined timeframe (typically three to five years) before earning performance units. Characteristics: The value of performance units bears no direct relation to the company’s stock price; payouts are made exclusively in cash.

How Should an LLC Design Its Equity Incentive Scheme?

Common equity incentive forms include: • Stock options—the most widely adopted equity incentive method; • Performance share plans—awarding shares upon achievement of pre-determined internal or external performance targets; • Restricted stock awards—grants of company shares to employees, subject to time-based restrictions and potential forfeiture; • Stock appreciation rights (SARs)—a long-term incentive tool granting executives the right to receive rewards equivalent to the future appreciation in the company’s stock price; • Phantom stock—a value-accrual arrangement granted to executives, linked to the registered value, fair market value, or formula-based valuation of the company’s shares; • Employee stock purchase plans—allowing employees to purchase company shares at a discount, typically via payroll deductions; • Employee stock ownership plans (ESOPs). Implementation of equity incentives should embody the core value principle of 'putting hardworking individuals first.' Huawei’s Basic Law exemplifies this philosophy—especially critical for startups and growth-stage enterprises. At such early stages, becoming a shareholder is not about enjoying benefits but about contributing through sustained effort. Thus, emphasizing the 'hardworking individuals first' principle is essential.

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