Employee Shares: How They Work

With employee shares, the company issues real shares to the employee upfront, often at nominal or low value, rather than granting a right to buy shares in future. The employee becomes a shareholder immediately, subject to vesting conditions, laid out in the same vesting rules that apply to other equity, that let the company buy back unvested shares if they leave early.

Because the employee owns shares from day one, many countries tax the value of the shares at grant, which can create a tax bill before the employee has any cash from selling shares. This is a major reason stock options are more common than outright share grants for early-stage employees.

• Reverse vesting: the company can repurchase unvested shares at nominal cost if the employee leaves early
• Transfer restrictions: shares typically cannot be sold to outsiders without board or majority shareholder consent
• Good and bad leaver clauses: often determine the repurchase price for vested shares as well as unvested ones
• Drag-along and tag-along rights: bind employee shareholders into a company-wide sale on the same terms as other shareholders

Restricted shares are more common for very early hires or co-founder-level joiners, where the share value is still low, making any grant-stage tax bill small. They are less common for later hires once the company's share value has grown, since options avoid an immediate tax charge on a high-value grant.