Equity & options
Also called SARs
Stock appreciation rights pay an employee the increase in a company's share price between grant and exercise, in cash or shares, without the employee ever buying the underlying stock.
A SAR is granted at a base price, normally the share price on the grant date. When the holder exercises it, they receive the difference between the current price and that base price, multiplied by the number of rights. There is no purchase and no exercise cost.
That is the practical difference from a stock option. An option holder must pay the strike price to acquire shares, which can be a real barrier when a company has grown and the strike is high. A SAR holder receives only the gain.
Settlement can be in cash or in shares. Cash-settled SARs are common in companies that want to reward employees without expanding the cap table, including subsidiaries and companies in jurisdictions where issuing options is administratively heavy.
SARs appear most often in later-stage private companies, in European structures where option taxation is unfavourable, and alongside phantom shares as part of a synthetic equity plan. They give employees exposure to the upside without the company issuing real stock.
The trade-off is that cash-settled SARs are a liability. If the share price rises sharply, the company owes real money at exercise, which has to be planned for.
An option holder pays the strike price to receive shares. A SAR holder pays nothing and receives only the appreciation, settled in cash or shares.
In most jurisdictions the gain is taxed as ordinary income at exercise, because it functions as compensation. Treatment varies by country and this is not tax advice.
Cash-settled SARs do not, since no shares are issued. Share-settled SARs do dilute, though less than an equivalent option grant because only the appreciation is delivered in stock.
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