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Equity Compensation - Help with mergers & acquisitions, raising capital, creating stock options and other equity plans

Archive for the ‘Equity Compensation’ Category

Employee Stock Purchase Plans – Learning the Basics


Will your ESPP help you reel in some cash?

Will your ESPP help you reel in some cash?

Employee stock purchase plans and all that may be associated with them are tough topics to fully comprehend, and while each company may have their own individual plans and procedures, the core concepts remain traditionally the same. The most frequently asked questions arise when an employee is faced with participating in an employee stock purchase plan for the very first time. To help ensure that you have an understanding of the choices, we have compiled a list of common questions and answers with the help of Fidelity.com, covering all the core concepts associated with these plans. Read the rest of this entry »

Rule 10b5-1: What Is It? Why Do I Care?

Do you understand your 10b-5 trading plan?

Rule 10b-5 was set forth by the SEC under the Securities Exchange Act of 1934 to allow insiders of a publicly traded corporation, like executives and board members, to have their own trading plan and invest in their own stock without any liability and avoid any charges of insider trading.

The qualifications for rule 10b-5 include that the individual must not be aware of any material non-public information, and the purchase must be made during an open window.  The rule 10b-5 trading plan also states that there should be detailed information of future plans to purchase or sell shares made by the individual at a time when the person has no knowledge of insider information. Furthermore, the individual must have documentation that shows all sales or purchases that were made in accordance with the preset trading plan. And of course, the plan must be adopted in good faith.  Read the rest of this entry »

Non-Qualified Stock Options – How Are They Different?

Will time bring you more money?

Employee stock options come in many forms and, because of the vast variety of option types, it can be very easy to become overwhelmed. Whether it is incentive stock options, restricted stock options, qualified or non-qualified stock options, each has its own set of rules, regulations and tax implications that need to be understood in order to fully capitalize upon the potential value of each option type. Understanding non-qualified stock options can be intimidating but our recent resource video will help get you all the answers you may be looking for.

What are non-qualified stock options?

Non-qualified stock options are a form of stock option that does not become taxable until the exercise date. This form of stock option is much simpler than qualified stock options because they do not meet all Internal Revenue Code requirements. Additionally, a non-qualified stock option can be granted to anyone, not just a company’s employee. Read the rest of this entry »

Employee Stock Options

What exactly is an ISO?

Employee stock options, as explained last week, are stock options that are offered to employees from their employer. Businesses often grant employees a share of the company’s stock. While the different stock options they give may seem confusing, we are here to ensure that the process is as clear and simple as possible. Today, we will talk about one kind of employee stock option called an incentive stock option.

What is an incentive stock option? Let us define it…

Incentive Stock Option: An incentive stock option, or ISO for short, is a stock option that is only available to employees. This exclusiveness comes with both pros and cons. This option will not affect your income tax if the shares are held for at least two years from the grant date and one year from the date of exercise.

What are the grant date and exercise date?

The grant date is the date that the company grants an employee the shares of the incentive stock. The exercise date is the date that the employee exercises their ability to purchase the shares of the incentive stock.

What if I do not wish to hold the stock for the two year time period?

If an employee who purchases the incentive stock seeks to sell the stock back before the two year period is over, then any gain on the incentive stock is taxed as regular income. The tax gain must be reported on an employee’s W2 form.

What if I sell the stock after the two year mark?

Taxes are due in the year that the sale takes place. If the incentive stock is held for over a calendar year, the employee must record the value of stock on the original exercise date. This value should be reflected in an employee’s AMT (alternative minimum tax) calculation.

We hope this was helpful in deciding if an incentive stock option is best for you. Keep in mind that there are a multitude of other employee stock options. Do not hesitate to contact us with any questions you may have. If you or anyone else you know is hoping to learn more about an incentive stock option, or employee stock options plan, then we urge you to contact Stock Connections, today.

Stock Connections specializes in working with San Francisco Bay Area companies that are involved in mergers & acquisitions, are raising capital, or creating stock option or other equity plans. We help start-up, private and public firms become – and remain – SEC-compliant. Stock Connections’ services are designed to help both start-ups and established firms comply with SEC and other regulations in their equity compensation programs. If you or anyone you know is looking to get involved with any of the above, we encourage you to contact us today.

Photo Credit: FaceMePLS

Restricted Stock and Restricted Stock Units: The Basics

Do you know your RSU’s?

Does your employer provide restricted stock or restricted stock units (RSUs)? Unlike stock options, this type of equity is always worth something, even if the price of the stock dramatically drops. What do you need to know about these options? This post shares the basics, from general concepts and differences between grant types to vesting schedules and taxes.

General Concepts of Restricted Stock and Restricted Stock Units

 Restricted stock units are almost identical to restricted stock; both are restricted ways of granting equity to employees. They’re “restricted” because they are dependent on a vesting schedule (such as length of employment or performance goals) and the company can impose limits on transfers or sales. The good news is they always hold some sort of value, even when the stock price drops. Read the rest of this entry »

Stock Appreciation Rights – What Are They? Do I Want Them?


Are your SAR’S putting money in your pocket?

Employers have various ways of compensating and rewarding their employees and with the presence of employee stock options and all the various forms of equity compensation plans. Understanding all these methods of compensation is important. Stock appreciation rights are some of the most rewarding forms and today we will explain what they are, why you should want them and how they work.

What are they? Stock appreciation rights are an employee incentive granted by a company according to a pre-determined plan. These grants allow employees the chance to receive benefits and a bonus of sorts that is equal to the appreciation or increased value of a stock over a specified amount of time.

Why do I want them? Stock appreciation rights are highly desired due to the fact that unlike employee stock options, no exercise price is to be paid.  At the end of a given period, the dollar amount that makes up the appreciation value will be given to the employee in a lump sum or placed in a retirement fund. Each company’s procedures will vary, so consulting your own plan will give you the best understanding of how stock appreciation rights apply to you and your plan.

How do they work? Stock appreciation rights give employees the benefit of being involved in the company’s stock performance without being financially responsible for the risks. For example, an employer grants one employee 200 stock appreciation rights and over a pre-determined period of time the stock value increases by one hundred dollars per share. A simple equation will give you the total profit made from this increase; total stock appreciation rights multiplied by the increased value will equal the total take away. In this case, 200 x 100 = $20,000 profit that will be given directly to employee.

As you can see, stock appreciation rights can be an effective means of providing employees with bonuses. Each company’s plan will be different and here at Stock Connections we are equipped with tools to maximize your understanding of the plan you have been given and how the stock appreciation rights will be applied to you and your future financial decisions.

Stock Connections specializes in working with San Francisco Bay Area companies that are involved in mergers & acquisitions, are raising capital, or creating stock option or other equity plans. We help start-up, private and public firms become – and remain – SEC-compliant. Stock Connections’ services are designed to help both start-ups and established firms comply with SEC and other regulations in their equity compensation programs. If you or anyone you know is looking to get involved with any of the above, we encourage you to contact us today!


Startup Questions: Cash or Equity Compensation?

Photo Credit: seekingthomas

A common question for startup companies is how much equity compensation, or shares of the business, they offer employees as part of their income. This can be an especially difficult question when the startup is new and the shares don’t hold much value yet.

What exactly is equity compensation? Because new companies don’t often have the financial means to attract high quality employees, many use this non-cash compensation as a way to give workers a form of ownership in the startup. Equity compensation refers specifically to stock options that include the right to purchase shares at a predetermined price, or exercise price. Over time, the option vests so the employee has the right to sell or transfer the shares, encouraging them to stay with the startup for a longer period of time.

It’s important to note that employees with equity compensation options are not considered stockholders so they don’t have the same right as shareholders. Equity compensation requires a lot of legal, accounting and tax planning, so it’s important for the startup and employees to look into the rules that apply to their situation.

How much should you offer in equity compensation? A Smart Bear explains that when someone works for less salary than they could make somewhere else, they’re making a cash investment into your company. How do you compensate through shares? Think about how much cash they’re giving up by working for the startup. Then make an educated guess as to how much the company could be worth in three or five years. Once you have those two numbers, you can determine what percentage of the company’s shares would be fair by dividing the cash the employee is giving up by the total amount you expect the startup to be worth in three or five years. Although it’s not an exact science, it will give you a good idea of a reasonable offer to make your employee. Read the rest of this entry »

Increase in Tax Rates – How They Could Affect Stock Compensation

Image Credit: Alan Cleaver

The current tax rates are set to expire at the end of this year, and unless they are extended it could affect your restricted stock/Restricted Stock Units (RSU) vesting, any option exercise or even Employee Stock Purchase Plans (ESPP).  However, it is important to keep in mind that the future possible changes in tax rates are not the only factor that could affect your stock compensation. Even a little increase in your company’s stock price can affect you.  Below are five different tax rates to keep in mind.

  • The Social Security rates could increase. Workers might have to pay 6.2%, up considerably from the current 4.2%. Keep in mind that these taxes apply to the yearly wage cap that is $110,100.
  • Under the new Affordable Health Care Act, Medicare tax rates will rise for high-income payers to 2.35% from the current 1.45%. Also, all capital gains will have a new Medicare surtax of 3.8% upon stock sales.
  • The capital gains rate that applies (currently 15%) could increase to 20%.
  • The dividend tax rate may rise all the way to 43.4% from 15%. This tax rate would apply to any of the dividends you have received on company stock.

Unless you have completely decided and planned on exercising your stock options very soon, increases in tax rates are not the only reason to take action.  You should be planning around your individual situation with taxes. It all depends on what your projections look like for potential increases in the stock price, the possible increase in taxes and how much time you have available to make a decision or exercise your options.

If you need help planning you taxes or have any questions regarding the tax rate and how it will affect your stock compensations give us a call. Stock Connections can help.

Incentive Stock Options: What Are They and Why Should I Want Them?


Photo Credit: AMagill

A form of equity compensations, incentive stock options provide unique tax benefits and complexity for employees and employers who are seeking smart stock options. But why are they so good, why should you want them and what do you do once you have one? Those questions are answered here.

Why are incentive stock options something to want? Why are they so great?

As opposed to non-qualified stock options, incentive stock options allow the avoidance of two hefty tax disadvantages. With non-qualified stock options, an employee is required to report all taxable income when their option is exercised and a stock is purchased. Additionally, that income is subject to tax at a rate that is much higher than that of any long term financial gains. These disadvantages have led many to seek incentive stock options for a multitude of reasons, one large one being the avoidance of these taxations.

Incentive stock options eliminate the need to tax in the way non-qualified options are taxed. With these stock options there is no income to report at the time of exercise. Furthermore, if the incentive stock options are held for an extended period of time, they could potentially earn long term capital gains if the predetermined holding period has expired.  However, if the shares are sold early, they are immediately taxed as ordinary income.

How do you go about getting incentive stock options?

Incentive stock options are usually included in a stock option plan that is traditionally adopted by a compensation committee or board of directors. How an employee qualifies is a dependent on the terms set forth by the board.

What do you get with your incentive stock option?

Besides the tax benefits and the obvious stock benefits, an employee will receive documentation of the stock options with all appropriate details of the option. Additionally, you will receive a stock option agreement; all of the stock option’s rules and regulations will be listed here. Be sure to pay attention to all of the details within this document so you can answer future questions as they present themselves.  Questions you will be able to answer could include the following:  When can I exercise? How do I exercise? How long are my stock options valid? Etc.

Incentive stock options are only one of the many facets associated with equity compensation plans; if you are anyone you know if looking to create an equity compensation plan of any kind, we encourage you to contact us today. Here at Stock Connections, we specialize in equity compensation plans and are prepared to answer any questions you may have regarding your own plan, incentive stock options and beyond.

The Truth about Equity Compensation Plans

Photo Credit: Images_of_Money

Understanding the options associated with an employee’s equity compensation plan can be a daunting feat to say the least, but dispelling common myths and misconceptions can help you better understand the programs you have access too. The following are some of the common misconceptions and the truths that we encountered with equity compensation programs.

What you’ve heard:  My company’s stock options are far too simple to require any consultation services or strategic planning.

Here’s the truth: By seeking professional advice, you are increasing your chances for profitable gain. Mistakes in financial situations are incredibly costly and can set you back immensely. With the help of financial specialists, you are safe guarding your investments.

What you’ve heard: I have restricted share grants, so I don’t need to manage any of my other options.

Here’s the truth: All of your outstanding options should be watched constantly. While little is required by you for restricted share grants, other options may expire and thus require attention at all times, to ensure that all financial opportunities are taken advantage of.

What you’ve heard: There are only three times that I should ever sell my stock options. I either need quick money, my shares will expire or the target pricing has been reached.

Here’s the truth: While there are three common factors to consider, they are not the three we have listed above. With the help of professional financial planners, you can find the best time to exercise your options according to factors like time value, your personal concentration and your long-term goals.

What you’ve heard:  Taxes can be avoided.

Here’s the truth: Taxes are a mandatory requirement within equity compensation plans and stock options. It is an unavoidable occurrence, but once again with the help of an effective financial planner, your tax liability can be positively managed.

As with any financial plan, consulting experts and doing research will help ensure a positive future. If you are looking to seek advice on your equity compensation plan, we encourage you to contact Stock Connections. We specialize in equity compensation plans and are prepared to answer any questions you might have.


Photo Credit: Randy Le’Moine Photography

An employee stock purchase plan is often built into an employee’s equity compensation plan and is a tax efficient method of offering stock options to the employees within a corporation. These options usually allow the employee to purchase shares of stock at a discounted price.

Employees contribute to an employee stock purchase plan by allowing deductions from their paychecks to occur. These funds are set aside for the purpose of purchasing stock at the end of a certain period of time.  This period of time is predetermined in the employee stock purchase plan as well as the determined percentage of pay deducted from each pay check. Once this time period has expired, the accumulated funds are used to purchase stock at the discounted and tax efficient price.

Discounts, contribution limits and time periods vary for every company, but to optimize the best possible gain, it is often advised for employees to contribute the maximum amount allowed. For example, if a share is offered to the public at the exercise price of $1.00 per share and you purchase a share at the discounted grant price of $.85 per share, you are receiving an instant 15% discount.  Many employees will sell their purchased share or shares immediately for hopefully, a profit. Even selling the shares the day of the purchase carries risk because the stock price could drop.  However, the profitable gain on each share is then taxed as regular income and the total profit becomes lowered.  To ensure the highest gain, investing the most amount of money possible into the purchase of these shares will ensure the highest gain after your tax liability.

Another option for your employee stock purchase plan is called a trailing stop. These work to guarantee that you do not suffer immense loss if the value of a share drops below a certain point. When a trailing point is activated, an alert is put into place to immediately sell the share(s) if the value falls below a predetermined point. This process keeps potential losses low.

While these are only brief insights into employee stock purchase plans and only a few of the well known maximization strategies, we are prepared to help you.  Stock Connections has an in-depth knowledge base that we are always willing to share with new clients. If you are looking to learn more about employee stock purchase plans or other forms of equity compensation please contact us and get started today.

What is the Sarbanes-Oxley Act and Why Do I Care? (Part Two)


Photo Credit: SqueakyMarmot

As we learned in our last post, the Sarbane’s Oxley Act is a piece of legislation set forth to help maintain and promote a high level of integrity when it comes to financial reporting. We have already discovered details about the first five titles within the act but with eleven total titles we still have plenty to share. Just to review, the first five titles involved the public company accounting oversight board, auditor independence, corporate responsibility, enhanced financial disclosures and analyst conflicts of interest.  The titles that we will cover in part two are equal in importance and help create a positive and responsible financial environment.
The remaining six titles are as follows:


6. Commission Resources and Authority: The sixth title of SOX maps out the SEC’s ability to bar securities professional from practice and further defines the ways that other professionals like brokers, advisors and dealers can also be barred from practice.


7. Studies and Reports: This title requires the SEC and Comptroller General to create multiple studies based on various financial findings. Examples of these studies would include studies on consolidation, credit rating agencies and various scandals like Enron and Global Crossing.
8. Corporate and Criminal Fraud Accountability: In its entirety, this title includes the specification of penalties for financial crimes like manipulation and destruction of records while also placing a level of protection on any reporter of a financial crime.


9. White Collar Crime Penalty Enhancement: Title 9 of SOX increases the penalties for anyone associated with conspiracies and white collar crime. It recommends stronger sentencing and clearly defines certain practices as criminal.


10. Corporate Tax Return: This being one of the simplest titles to understand defines signing responsibility and states that the CEO should be the signer of all federal tax returns.


11. Corporate Fraud Accountability:  The final title defines various aspects of fraud as criminal offenses (e.g. tampering) and identifies the penalties of those crimes. This title also gives the SEC authority to temporarily freeze suspicious payments for investigation.


As you can see, the eleven titles included in the Sarbanes Oxley Act map out a wide array of issues that have effected financial and corporate crime in the past. While it is a hard topic to understand, here at Stock Connections, we do specialize in SOX and SEC compliance, if you have any questions, please feel free to contact us. We are happy to help.

Equity Compensations: Four Plans Every Employee Should Know

4 Types of Equity Plans

Equity plans are popular among employers.

Equity Compensation has been very popular among employers in the Silicon Valley for many years. These plans provide innovative options for employers to motivate their employees and assist in creating a positive work environment.  Stock options and financial incentives are attributes that job hunters look for when searching for a quality workplace, but with various plans and options in existence it can be overwhelming to try and understand all the options that an employer can offer their team members.

There are four common types of equity compensation plans:

Restricted Stock Unit: A restricted stock unit involves a company giving employees a designated amount of shares at no cost. These shares eventually become vested after a pre-determined amount of time and what this means is that ownership does not occur until the shares are fully vested. This plan is often merit based and is a form of deferred equity compensation used to promote loyalty among employees as well as to retain quality and skilled team members.

Restricted Stock Award: A restricted stock award is very similar to the restricted stock unit. In this case, a company grants a determined amount of shares also at no cost but instead of ownership occurring after a vesting period it occurs at the time of the grant. Typically, the shares are released to the employee over a three to four year vesting period and the purpose is to monitor employee performance as well as to encourage future quality of work. 

Employee Stock Purchase Plan: An employee stock purchase plan usually involves a voluntary salary deduction of up to 15% of an employee’s salary to be deducted from each paycheck; the funds are  placed in a non-interest bearing account. The money deducted during a pre-determined amount of time is used to purchase company shares at a discount from the fair market price. This plan allows the use of an employee’s own money to purchase shares with low risk.

Employee Stock Option: An employee stock option is a tactic used by companies to motivate short-term goals among their employees. A number of shares are reserved for employee purchase and are vested over time, allowing growth and company value to build. It encourages employees to behave in ways that boost the company’s stock value.

All of these plans have tax implications for both the employee as well as the company and must be reported in an accurate and timely fashion to various tax authorities.

Equity compensation plans can be difficult to understand and while the four basic plans have been introduced in this post, it is best to seek professional advice if you are considering implementing a plan or if you have questions concerning your own plan. Here at Stock Connections we specialize in equity compensation plans and we encourage you to contact us with your questions. We are happy to help. 

Photo Credit: khrawlings

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