Stock Appreciation Rights (SARs)
Definition
A grant that gives you the right to receive cash (or sometimes shares) equal to the appreciation in stock value over a set period, from a base price to the current price. Like phantom equity, SARs can provide equity-like upside without actual share ownership. SARs can be settled in cash or stock.
Real-World Example
You receive 5,000 SARs with a $10 base price. Five years later, the stock is worth $45. You receive the $35/share appreciation: 5,000 x $35 = $175,000 in cash (or equivalent in shares), taxed as ordinary income.
Common Mistake
Treating SARs as identical to stock options. While the economic outcome can be similar, SARs do not require you to purchase shares (no cash outlay). However, SARs are taxed as ordinary income at exercise, whereas ISOs can qualify for long-term capital gains treatment.
Why It Matters
SARs eliminate the exercise cost problem of stock options while providing similar upside. They are increasingly common at late-stage private companies looking to compensate employees without cap table complexity.
Related Terms
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