The two models of equity incentives—restricted stock and stock options

Before discussing the concepts, here are two key considerations: 1. Timing of implementation: It is essential to clearly identify the company’s current developmental stage and its future growth potential. The design of the equity incentive plan must be closely aligned with the company’s development status and personnel situation. Moreover, since equity incentives represent sharing in the company’s *future* gains, implementing them around major corporate events—events that are typically closely tied to the company’s valuation—tends to yield more pronounced effects and can also serve a role in market capitalization management. 2. Employees must pay for the equity. Free gifts are seldom valued; worse, they risk becoming de facto welfare benefits, thereby undermining the intended incentive effect. I. Conceptual Overview Purpose: Not merely to retain talent, but to prepare for the company’s long-term strategic development—ensuring current personnel are equipped and motivated to contribute toward that future vision. Personnel Selection: Who is needed *now*, and who should be cultivated *for the future* (so employees begin working toward those goals immediately). Incentive Instrument: Equity. Share Allocation: Less than 10% of total share capital; no individual recipient may receive more than 1%. Acquisition Price: Purchase at a discounted price either now or in the future. Granting Method: For listed companies, both restricted stock and stock options are released or exercised in tranches. Restrictive Conditions: Time-based vesting + performance-based conditions. Returns: If the stock price declines, the incentive loses its effectiveness. Thus, the company must carefully assess its growth trajectory and the actual incentive impact. Exit Mechanism: Scenarios triggering exit + transfer pricing. II. Regulatory Interpretation Primary reference: *Measures for the Administration of Equity Incentives of Listed Companies*, effective August 13, 2016. General Provisions: Eligible Recipients: Directors, senior executives, and core employees (excluding independent directors and supervisors). Applicable Instruments: Restricted stock and stock options. Exclusion Criteria: Where the company’s financial statements or internal control reports have received an adverse or disclaimer opinion from auditors. Performance Evaluation Metrics: Both corporate-level and individual-level performance. Specific Metrics Include: Return on net assets, earnings per share, dividends per share, net profit growth rate, and main business revenue growth rate. Sources of Shares: Newly issued shares or treasury shares repurchased by the company. Plan Duration: No longer than 10 years. Quantity Limits: Total grants ≤ 10% of total share capital; individual grants ≤ 1%. Reserved Awards: Up to 20% of the total plan (the grant recipients for reserved awards must be determined within 12 months after shareholder approval; otherwise, such reserved awards lapse). Equity incentive plans may be implemented during major corporate events—including new share issuances, M&A, asset injections, issuance of convertible bonds, or corporate bond offerings. No filing with the China Securities Regulatory Commission (CSRC) is required. The company may not provide financial assistance to incentive recipients. Restricted Stock: 1. Refers to shares subject to resale restrictions. 2. Requirements regarding grant price: Must be no lower than the higher of the following: • 50% of the closing price on the trading day immediately preceding the announcement date of the plan draft; • 50% of the average closing price over any one of the preceding 20, 60, or 120 trading days. First Vesting Date: At least 12 months after the grant date. Vesting occurs in tranches, with each tranche separated by at least 12 months; the proportion vested per tranche may not exceed 50% of the total granted amount. If the plan is terminated, the company must repurchase the shares at a price no higher than the original grant price—or the grant price plus accrued bank deposit interest. Stock Options: 1. A right to purchase a specified number of company shares at a predetermined price within a specified time period. 2. Requirements regarding exercise price (alternative methods require engagement of an independent financial advisor): Must be no lower than the higher of the following: • The closing price on the trading day immediately preceding the announcement date of the plan draft; • The average closing price over any one of the preceding 20, 60, or 120 trading days.

What is an 'option'? An 'option' is the right to purchase a specified number of 'shares' at a predetermined price per share, exercisable within a defined time period. After receiving the option grant, the employee may choose to exercise this right ('exercise'), or may choose not to exercise it. Why does the 'company' grant 'options' to employees? 'Options' are granted to employees—or core/key talents—who contribute to achieving the company’s performance objectives, thereby offering them an opportunity to share in the company’s financial success. Will an 'option' necessarily generate returns? An 'option' confers only the *right* to purchase company shares within a specific timeframe. Only upon exercising that right (i.e., 'exercising') does the employee actually acquire company equity—and thus become eligible to share in the associated 'returns'. Whether actual 'returns' materialize depends—as with buying stocks—on multiple uncertain factors: the employee incurs exercise costs and related taxes, yet the company’s eventual IPO, acquisition, or internal buyback—and the share price at the time of such events—are all uncertain. Consequently, the proceeds may fail to cover the employee’s out-of-pocket costs, resulting in a loss. Should the company fail entirely, the options become worthless. What is a 'grant agreement'? The company’s 'grant agreement' is typically drafted in English and is commonly referred to as the 'option agreement'. It is a formal contract signed between the 'company' and the 'participant' (i.e., the employee receiving the stock options), specifying the terms and conditions governing the grant—including the type of option, the number of shares issuable upon exercise, the vesting schedule, the exercise price, the grant date, and the expiration date. Where can I access information about my 'options'? At a certain stage, companies often partner with third-party equity administration platforms (e.g., Computershare). Employees may then independently log in to the platform’s web application to view information related to their options and detailed holdings. How do I determine the number of 'options' available for exercise—or the number of unvested restricted stock units (RSUs)—at any given time? This information is accessible via the company’s employee self-service portal. Under 'My Shareholdings', select 'Shareholding Information', then choose the relevant plan to view the number of exercisable options or unvested RSUs. What is 'Cash Exercise – Full Hold'? Prior to the company’s IPO, employees may only exercise options via 'Cash Exercise – Full Hold'—i.e., using personal cash to fund the exercise. Specifically, the participant (i.e., the employee holding the stock options) must prepay the full exercise cost, applicable personal income tax, and exercise processing fees. Upon completion, the participant receives the company’s equity. Active employees must remit the required exercise payment to the company’s designated bank account by the end of the month in which the exercise occurs. Former employees must make the payment within seven calendar days of receiving the exercise payment notice; otherwise, the exercise instruction will be automatically canceled.

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