Quick Refresher on Equity Refresh Grants

Equity compensation is a powerful tool for attracting and retaining talented employees. However, as employees provide services to a company over time, the initial new hire equity grants vest and may no longer provide sufficient retention incentive. Equity refresh grants can help boost employee motivation, performance and morale. Below is an overview of key considerations around equity refresh grants. While this article focuses largely on US law and practice, many of these principles may apply in other jurisdictions.

Equity refresh grant basics

An equity refresh grant is an additional award of equity compensation given to existing employees. These grants are designed to add an additional incentive to encourage employees to stay with the company by increasing their equity stake. Refresh grants are sometimes referred to as “retention grants,” “supplemental grants” or “evergreen grants,” and are a useful tool to maintain alignment between employee and company interests and reward continued contributions.

A distinct situation arises where employees hold equity significantly below market levels, often due to dilutive financing events, and require additional grants to reach a competitive position. That scenario involves different considerations and may implicate structural measures, such as recapitalizations or management carve-out plans. Companies in that situation should consult with counsel.

Various uses for refresh grants

Companies implement equity refresh programs for several strategic reasons. First, as initial grants vest, employees may begin to feel less tied to the company’s long-term success. Refresh grants restore this connection by giving employees a renewed stake in future growth. Second, in competitive talent markets, employees with fully vested or nearly vested equity may be more susceptible to recruitment by competitors offering new equity packages. Refresh grants can help level the playing field by ensuring that staying with the current employer remains financially attractive. Third, refresh grants provide an opportunity to recognize and reward high performers, signaling that the company values their contributions and wants them to remain part of the team.

Design structure and timing

Companies structure their equity refresh programs in various ways depending on company philosophy, stage of growth and competitive landscape. Some companies provide annual refresh grants to employees on a fixed cycle, often coinciding with annual performance reviews or compensation planning cycles, or on the anniversary of an employee’s hire date or the anniversary of an initial grant. Annual refresh grants often vest over a four-year period, and a frequent grant cadence creates overlapping vesting schedules ensuring employees always have unvested equity. For example, an employee who receives an annual refresh grant would have equity vesting from multiple grants simultaneously, creating a continuous stream of vested and unvested awards. Some companies prefer to issue larger refresh grants less frequently, perhaps every two or three years, often timed to coincide with the completion of an initial grant’s vesting schedule.

Other companies take an ad hoc approach, awarding refresh grants on an individual basis based on each employee’s individual unvested and vested equity amounts, as a customized retention package, or as a result of an employee’s individual performance or promotion.

Companies in highly competitive talent markets may issue more frequent refresh grants to ensure a strong retention profile relative to competitors.

One notable distinction between refresh grants and initial new hire grants is in the vesting structure – most refresh grants have no “cliff” on vesting. This differs from typical new hire grants, which often include a one-year cliff before any portion of the award vests. The absence of a cliff for refresh grants reflects the fact that the employee has already demonstrated commitment to the company through their initial tenure, making an additional cliff period less necessary from a retention standpoint. That said, some companies do apply a cliff to their refresh grants, sometimes using a cliff period shorter than one year.

Forms of equity awarded in refresh grants

Refresh grants can take various forms depending on the type of company and its equity compensation strategy. Stock options, including both incentive stock options and nonqualified stock options, remain a common form of equity used for refresh grants, particularly at earlier and mid-stage private companies. Restricted stock units (RSUs) are increasingly popular among late-stage private companies, typically companies with a valuation at or above $1 billion. Some companies also use performance-based equity or other structures depending on their specific circumstances and objectives. The choice of equity vehicle for refresh grants often mirrors the type used for initial grants, though companies may adjust their approach as they mature or as market practices evolve.

Calculating refresh grant values

One of the most challenging aspects of administering an equity refresh program is determining the appropriate size of refresh grants. Compensation consultants can help provide market data and competitive benchmarking to help ensure that total equity compensation remains competitive with peer companies. The employee’s level, role and performance often influence the size of refresh grants. Some common approaches to calculating the size of a refresh grant include targeting a percentage of the employee’s original grant or following guidelines under the company’s equity grant policy for the employee’s level at the time of the refresh grant. Later-stage companies sometimes size the grant based on the implied dollar value at the time of the grant. Establishing ranges for refresh grants by level provides a framework for managers while allowing flexibility to account for individual circumstances. Some companies also consider the value of an employee’s remaining unvested equity, adjusting refresh grant sizes to ensure that total unvested holdings meet a target threshold.

Regulatory and tax implications

Equity refresh grants carry important tax and legal implications that both employers and employees should understand. From a US tax perspective, the treatment of refresh grants depends on the type of equity awarded. Stock options, RSUs and other forms of equity each have distinct tax consequences for recipients, and the timing of taxation may vary based on vesting structures, exercise timing and the applicability of elective tax treatment, such as elections under Section 83(b) of the US Internal Revenue Code.

From a legal and compliance standpoint, companies must ensure that refresh grants comply with the terms of their equity incentive plans, including any limits on the number of shares available for issuance. Securities law considerations, including registration requirements and exemptions, also apply to refresh grants just as they do to initial equity awards.

Best practices

Transparency and communication are essential; employees should understand how refresh grants work, when they can expect to receive them and what factors influence grant sizes. Consistency and fairness help ensure that employees perceive the program as equitable, which supports morale and retention. Regular benchmarking against market data helps ensure that the company’s refresh program remains competitive. Finally, integrating refresh grants into the broader compensation strategy ensures that equity, cash and other benefits work together to attract, motivate and retain talent.

Key takeaways

Equity refresh grants can be a key component of a comprehensive equity compensation strategy. By providing ongoing equity awards to existing employees, companies can maintain the retention power of equity compensation, reward continued contributions and remain competitive in the market for talent. Whether structured as automatic annual grants or discretionary awards tied to performance and promotion, a well-designed refresh program helps align employee and company interests over the long term. Companies designing or refining their refresh programs should pay careful attention to key design variables – including the type of equity vehicle, cadence and size of awards, applicable vesting terms and population of eligible employees – as market practices continue to evolve.