What is a virtual stock option plan (VSOP)?

Virtual Stock Option Plans (VSOP)

Many companies offer employees stock options (essentially partial ownership of the company) as part of their compensation package. However, many startups offer virtual stock options as an alternative.

A virtual stock option plan (VSOP) guarantees that an employee will receive a cash payout at a designated time or when a specific event occurs in the future. The IRS considers these plans a form of non-qualified deferred compensation where an employee has a legally binding right to a future cash payment tied to the value of company shares. The payment amount depends on how much virtual stock the employee owns and the value of the stock at the time of payment—some virtual shares are worth only a portion of a traditional share.

In a VSOP, you're not an actual shareholder—your "ownership" exists on paper only. You won't get voting rights, attend shareholder meetings, or receive dividends.

Companies set their own program rules for who qualifies and how many options they offer. Key factors that influence share offerings include:

Job role
Job category
Seniority

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How does a virtual stock option plan work?

A virtual stock option plan (VSOP) is a cash bonus program tied to company stock performance—you receive money, not actual shares. Unlike traditional stock options, you don't buy or hold real equity.

The process typically follows a few key steps:

Grant: The company awards you a specific number of virtual stock options (VSOs).
Vesting: You must remain with the company for a set period, known as the vesting period, before you have a right to the value of your VSOs. For example, one company's SEC filing specifies that awards vest on the fifth anniversary of the grant date or earlier in cases of a change of control, death, or disability. Many plans include a "cliff," a minimum time you must work (often one year) before any options begin to vest.
Payout Event: The plan defines a specific trigger for payment. This is often a liquidity event like an acquisition, an IPO, or a designated date.
Cash Settlement: When the payout event occurs, the company calculates the value of your vested VSOs based on the company's current valuation and pays you the amount in cash, minus any applicable taxes.

Why do companies offer virtual stock option plans?

So, what's the point of a virtual stock option program? It aligns company and employee interests by tying your cash payout to stock performance. When the company does well, your payout increases—giving you real incentive to help drive results.

Although employees are the most common participants in virtual stock programs, some companies extend the option to third-party vendors, investors, directors, and others. This is most common in startups.

Virtual stock options vs. traditional stock options

It's easy to confuse virtual stock options with their traditional counterparts, but they serve different purposes. The main distinction comes down to ownership.

Virtual Stock Option Plans (VSOPs):

Payment type: Cash bonus based on stock performance
Ownership: No actual equity or voting rights
Cost to you: Nothing—no exercise price

Traditional Stock Options:

Payment type: Right to buy shares at a set price
Ownership: Real equity and potential voting rights
Cost to you: Must pay exercise price to own shares

What do employees need to know about virtual stock option plans?

Most virtual stock programs have specific requirements before you can collect payment. The main requirement is vesting—working for the company for a set period.

Key requirements typically include:

Vesting period: Usually 1-4 years of employment
Performance targets: Meeting defined company or individual goals
Employment status: Remaining with the company through the cliff period

The period when employees can't collect their virtual stock options is known as the cliff. During this period, if the employee leaves the company for any reason, they forfeit their VSOs. Once vested, depending on program policy, employees may receive their allotment of VSOs or a portion, with more added annually, until they reach the cap.

There are tax implications to participating in a virtual stock option plan. Although the initial grant of virtual stock is not subject to taxation, the payout is taxed as regular income. According to the IRS, the fair market value of phantom stock is considered wages when it vests, and any subsequent appreciation is treated as income subject to FITW (Federal Income Tax Withholding) upon payout. In some cases, the value of the stock is taxed when the employee becomes vested if the virtual stock is tied to the value of the actual stock. Usually, these stocks do not earn dividends, but the standard tax code applies if they do.

What do employers need to know about virtual stock option plans?

From an accounting perspective, VSOPs are treated as deferred compensation. This creates some balance sheet considerations:

Annual adjustments: Liability changes as stock value fluctuates
Balance sheet impact: Can make the company appear more indebted because accounting standards require a cash-settled award to be classified as a liability.
Reality check: The appearance is usually worse than the actual financial impact

Companies need to have provisions for when vested employees make a claim.

Clear and detailed record-keeping is critical to a successful VSOP. Startups looking for investors or considering a sale need accurate records of who has virtual shares, how many, and the promised payments to avoid the uncertainty that could drive away potential investors, partners, or buyers.

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Virtual stock option plans can be a powerful tool for motivating a distributed team, aligning everyone toward a common goal without the legal complexities of cross-border equity. But it's just one piece of the puzzle. To truly attract and retain top talent worldwide, you need a holistic rewards strategy.

Oyster's Total Rewards solutions help you design and deliver competitive, compliant compensation and benefits tailored to each country. From salary benchmarking to localized benefits packages, we make it easy to care for your team, no matter where they live. Start hiring globally and build a compensation strategy that scales with your business.

FAQ’s

Are virtual stock options the same thing as VSOPs or phantom shares?

Most of the time, yes—people use “virtual stock options,” “VSOPs,” and “phantom shares” interchangeably to describe a contractual right to a future cash payout that’s linked to your company’s valuation. The practical difference usually isn’t the label, it’s the plan terms: what counts as a payout event, how the payout is calculated (full share value vs. a fraction), and what happens if someone leaves before a liquidity event.

How is the value of virtual shares actually calculated at payout?

Plan documents typically spell out a valuation reference point and a payout formula, and that’s where the real “gotchas” hide. Your payout might be tied to a specific valuation method (for example, the price paid in an acquisition or a board-approved fair market value), and it may be reduced by things like a virtual “exercise price,” a participation factor, or a cap that limits upside. Before you sign, ask how the plan handles down-rounds, whether it uses gross proceeds or net proceeds after preferences and transaction costs, and whether partial vesting or acceleration applies in different exit scenarios.

What’s the biggest risk for employees with virtual stock options?

It’s assuming a VSOP is “equity” when it’s really a promise of cash under certain conditions. If there’s no liquidity event, no defined settlement date, or the plan gives the company broad discretion to change terms, your upside can end up being theoretical. You’re also taking on concentration risk: your payout depends on the company’s future value and on being employed long enough to vest, so it’s worth pressure-testing the plan the same way you’d sanity-check any other part of your compensation.

How do virtual stock options work for global employees in different countries?

This is where compensation strategy meets compliance reality. A VSOP might be simpler than issuing real equity across borders, but it still creates country-specific tax and payroll questions, especially at vesting or payout. If you employ people through an Employer of Record (EOR), you’ll usually want to confirm how the cash settlement will be treated locally—whether it runs through payroll withholding, what reporting is required, and how timing affects take-home pay—because “it’s just a bonus” is rarely true once multiple tax regimes get involved.

Do virtual stock options affect payroll taxes or withholding like regular compensation?

Often, yes—especially at the moment the cash becomes payable, and sometimes when the right becomes vested, depending on how the plan is structured and what local rules apply. That can mean withholding obligations, employer contributions, and reporting requirements that look a lot more like payroll than like capital gains. If you’re managing a global team, align Finance and People early so you don’t get surprised by employer tax costs or by a payout that lands in the same month as payroll and blows up cash planning.

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, hire, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

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