As an employee with stock options, restricted stock units (RSUs), or other forms of equity compensation, you may have questions about how your ownership stake interacts with your voting rights. It’s a topic that isn’t always straightforward, and it's important to understand the nuances. Here’s a breakdown of key concepts:
1. The Difference Between Equity and Voting Rights
Equity: Equity represents ownership in a company. This can take various forms like stock options (the right to buy shares at a specific price), RSUs (actual shares that vest over time), or performance shares.
Voting Rights: These are the rights granted to shareholders to participate in corporate decisions by casting votes on matters like electing board members or approving major corporate changes.
The key thing to remember is that owning equity doesn't always guarantee voting rights. The type of equity you hold and the specific terms of your company's stock plan determine whether and when you can vote.
2. Voting Rights and Common Stock Ownership
Direct Stock Ownership: If your equity compensation has already converted into shares of common stock that you directly own (e.g., RSUs that have vested and been settled), you generally have voting rights associated with those shares. Each share typically carries one vote.
Brokerage Account: Your shares will typically be held in a brokerage account. If this is the case, you will receive voting materials from your broker, usually before shareholder meetings.
Example: Let's say you received 1,000 RSUs that have fully vested and been converted into 1,000 shares of common stock. You should be eligible to vote those 1,000 shares. Your brokerage firm will send you voting materials, which usually includes a unique control number to vote online, by phone or by mail.
3. Voting Rights and Unvested Equity (Stock Options, Unvested RSUs)
Stock Options: Unexercised stock options typically do not come with voting rights. You only become a shareholder, with voting rights, after you exercise the option and purchase the shares. The right to purchase is not the same as ownership of the stock
Unvested RSUs: Similarly, unvested RSUs usually do not carry voting rights. You only gain voting rights once they vest and settle (become actual shares of stock).
Example: Suppose you have stock options for 2,000 shares of your company’s stock and 500 unvested RSUs. You can't vote on these because you do not yet hold actual common shares of the company. Even if the options are “in the money”, which means the current market price is higher than your option purchase price, you would still need to exercise these options to buy and hold the stock.
4. Understanding Voting Classifications and Share Structure
Multiple Classes of Stock: Some companies have multiple classes of stock, often Class A and Class B. Class A shares often have one vote per share, while Class B shares may have more voting power or different rights, even though they have similar economic value (meaning a similar market price).
Preferred Stock: Employees usually don't hold preferred stock, but it's worth mentioning. Preferred stock typically prioritizes dividends and liquidation rights over voting rights.
Understanding the Company Charter: To fully understand the voting rights associated with different types of stock, review the company's charter, which is usually available via the investor relations section of the company website. This document clarifies the differences in voting rights associated with different classes of shares.
Example: If your company has Class A and Class B stock, your shares may have different voting rights based on the class they are assigned to. This distinction is important and will be outlined in your grant documents.
5. Exercising Your Voting Rights
Proxy Materials: Your broker will send you proxy materials before shareholder meetings. These will include information about the issues to be voted on.
How to Vote: You can usually vote through multiple methods (online, by phone, or by mail).
Voting Deadlines: Be aware of the deadlines for voting. If you miss the deadline, your vote may not be counted.
6. Importance of Voting as a Shareholder
Corporate Governance: Voting allows you to participate in decisions that shape the company's direction.
Influence: As a shareholder, your voice matters, particularly when decisions may affect the value of your stock.
Staying Informed: Voting requires you to become more familiar with your company and its direction.
Key Takeaways for Employees with Equity:
Not all equity grants voting rights: Generally, vested stock provides voting rights, while options and unvested shares do not.
Review your grant documents: Your specific grant documents will detail the terms and conditions of your equity and if and when they will carry voting rights.
Understand the share class: If your company has multiple share classes, determine what class your equity will become, and the specific voting rights associated with it.
Actively participate: Don't ignore voting materials. Exercising your right as a shareholder is an important part of corporate governance.
Consult with a Financial Advisor: For personalized advice, consider speaking with a financial advisor who can help you navigate your equity compensation and voting rights.
Disclaimer: This article provides general information for educational purposes only and is not intended as legal, tax, or financial advice. Always consult with qualified professionals for specific guidance.