From "Introduction: Creating an Equity Compensation Plan That Works for Your Company"

Companies
can offer employees a variety of kinds of equity in their plans, with
some restrictions. ESOPs, for instance, must own stock with the highest
combination of voting and dividend rights (typically Class A common) or
stock that is convertible into that class of stock. Profit sharing and
401(k) plans cannot own options or other forms of equity rights. The
necessity that the ESOP get shares that carry voting rights (or shares
convertible into such shares) is, as we will see later, not really a
problem and should not be a factor in choosing or not choosing an ESOP
as it does not mean that owners who want to maintain control of the
company must cede that control to workers.

There is no such
voting rights requirement for stock option, restricted stock,
performance share, or stock purchase plans. Although they all typically
provide the right to buy or own common stock, they could just as well
offer preferred shares or some other variety of common stock. (Preferred
and super common stock typically have higher dividend and/or
liquidation rights; in a few cases, special classes of common stock with
special voting rights have been created.) The shares may or may not
have voting rights, although the existence or lack of these rights may
affect how the shares are valued. A company that does not have stock
because it is an LLC or a partnership, for example, can offer ownership
by granting partnership rights or units instead of stock.

The
issue of whether unvested or unexercised equity awards can pay dividends
is specific to each type of vehicle and thus is discussed in the
individual chapters. In some cases, dividends paid on such awards lead
to steep taxes for the award recipient under the tax rules governing
deferred compensation.

From Chapter 2, "Unrestricted Stock Grants and Stock Purchase Plans"

Direct
stock grants are straightforward and, unlike stock plans that are
tax-qualified under the Internal Revenue Code (the Code), such as
Section 423 ESPPs, discussed later in this chapter, or employee stock
ownership plans (ESOPs), discussed later in this book, they have no
particular legal requirements or restrictions on their use. The company
can give them to a single person, to a group or groups, or to all
employees. Direct stock grants can be used in a variety of ways as the
company pleases. For example, a grant can be given as a bonus, as an
adjunct to other stock arrangements (such as giving employees a free
share of stock for every share they buy through a stock purchase
program), or even as part of the salary at a cash-starved startup
company.

The shares that are granted may be "restricted" in the
sense of transferability restrictions, such as that the shares can be
resold only to the company, that they must be resold to the company when
employment terminates, or that the company has a right of first refusal
when the shares are sold. This allows a private company to keep stock
"in the family" (literally or figuratively) and avoid ex-employees or
unwanted outsiders gaining ownership and perhaps some degree of control.


Since a direct stock grant makes the employee a shareholder,
that person now will have the same voting rights and other privileges as
do other shareholders of that class of securities. For a given
employee, employee group, or everyone receiving stock grants, the
company may wish to use shares with certain voting attributes or even
create a new class of shares with the desired attributes. Even in S
corporations, which are limited to one class of stock, it is permissible
to have "differences in voting rights among the shares of common
stock." Typically, a company would limit the voting rights granted to
employees because it was sensitive to control issues. However, the
experience of many employee ownership companies, such as ESOP companies
(which must pass through at least a minimum subset of voting rights to
ESOP participants), is that this is not a big issue. Employees generally
have no desire to use their voting rights to turn the company upside
down and, in any event, would typically not own enough stock to do so.
Also, excessively limiting voting rights may send the wrong message to
employees: "We want you to think and work like an owner, but we don't
trust you."

From Chapter 5, "Performance Award Plans"

The first
step in proper alignment is to clearly define the purpose of the plan.
Compensation programs are intended to attract, motivate, and retain
staff members. It can be difficult to design a single program that
equally meets all three of these objectives. Most often performance
plans are designed to first motivate staff and then to retain them. At
present, these programs are seldom used to attract new staff. Once you
have defined your programs' high-level objectives, you must then clarify
the specifics of what you are trying to motivate and who you are trying
to retain. You must also define how you will link these individuals to
the intended objectives of the plan.

Companies with successful
performance equity plans have thoroughly analyzed the elements that
relate directly to their performance. Unlike many other types of equity
plans, it is very difficult to determine the proper metrics to use based
on a simple review of competitive market data. With the exception of
total shareholder return (TSR), the specific metrics used in these plans
are usually as unique as each individual company. A thorough analysis
requires a review of financial, operational, and human resources metrics
and objectives from the past. This analysis must then show a link
between those metrics and objectives and their impact on both corporate
performance and (hopefully) the stock price.

From Chapter 7, "Equity Interests in Limited Liability Companies"

An
LLC employee who receives a capital interest without a substantial risk
of forfeiture (that is, a vested capital interest) in exchange for
services rendered recognizes compensation income in the year of the
grant equal to the fair market value of the interest. The market value
of this interest, for purposes of computing the employee's income and
the LLC's deduction, may be determined in one of several ways: by
reference to the value of the services rendered to the LLC's assets; by
determining the value of the capital that was shifted from existing LLC
members to the new grantee; by determining the value according to what a
willing buyer and willing seller would agree upon as a purchase price
in an arm's-length sale (i.e., the willing buyer/willing seller test);
or by determining the amount the employee would receive upon a
liquidation of the LLC at the time the interest is issued (i.e., the
liquidation value). Regardless of the method used to determine fair
market value, income and employment tax withholding will be required.