The core concepts of equity compensation, such as the vesting of grants or the exercise and expiration of stock options, are similar. In general, these grants at pre-IPO companies are more broad-based, with new-hire awards at all employee levels. The tax treatment is also the same, though the status of shares as restricted securities can present a tax dilemma.

The differences include the following.

  • Liquidity. The liquidity of the company's stock, which usually requires an initial public offering (IPO) or an acquisition. The typical restriction on resale is an SEC requirement and is usually also contractually mandated. That lack of liquidity affects how you come up with money for tax withholding, prevents share sales at exercise to pay the exercise price and any taxes, and limits your ability to freely sell the shares for a gain once you own the stock outright. As private companies take longer to go public or get acquired, they are increasingly sponsoring liquidity programs, often through tender offers. Private resale markets have also developed.
  • Possibility of exercise before vesting. With stock options at some private companies, you may have the ability to exercise the options immediately upon grant, with a vesting period on the shares received at exercise. These early-exercise options carry both benefits and risks.
  • Valuation uncertainty. As there is no public trading price, the company's stock and options are valued by any of a few methods provided under IRS rules. This is especially important for setting exercise prices, as the company must avoid granting discounted stock options.
  • Company rights. Buyback provisions and repurchase rights in some grants allow your employer to repurchase your shares if you leave the company.
  • Grant types. Contrary to the current trend toward restricted stock/RSUs at publicly traded companies, private companies are more likely to grant stock options than restricted stock/RSUs. However, some large private companies do grant RSUs, often with double-trigger vesting. Performance share grants are rare, except in the very last months before an IPO or at private-equity-controlled companies.
  • Vesting conditions. Some grants fully vest only upon an IPO or acquisition. In addition, early-stage companies tend to grant equity awards that vest monthly after an initial one-year cliff vesting period from the date of hire, perhaps 36 or 48 months after the initial cliff period ends.
  • Investor rights. Cash investors may have special rights that limit their dilution and give them priority to the proceeds in any sale of the company.

The stock plans of private companies also differ from their counterparts at public companies. For details, see the article Drafting An Equity Incentive Plan For A Private Company: Issues Your Company Considers. Stock grants in LLCs also differ, as explained in an article series elsewhere on this website. As a private company grows larger, especially if it prepares for an IPO, its stock grant design and types of grants are likely to change, as explained by another article.