“Equity Compensation” is when a company compensates its Employees and consultants with Equity Securities as a substitute for or supplement to a traditional compensation package (e.g., salary or consulting fee, benefits, etc.). The most common types of Equity Compensation are Restricted Stock grants and Stock Option grants. These Equity Compensation grants usually are subject to a Vesting schedule and transfer restrictions so that the company is protected if the employment or consulting relationship terminates.
A company may choose to compensate an Employee or consultant with Equity Compensation because (i) cash is tight, (ii) the company wants to motivate and reward a valued team member or (iii) the company wants to align the interests of the Employee or consultant with those of the company. Not surprisingly, Employees and consultants may prefer Equity Compensation because it allows them to participate directly in the future growth of the company and the related financial upside.