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

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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 Options – The Basics

 

How do I turn my stock options into cash?

Stock options can be a tricky thing to comprehend and the terminology associated with these options can be rather confusing as well. To help combat the confusion that many employees experience when issued stock options, we have created a series of videos to help our clients better understand the elements involved in various financial situations. Today, we introduce the basics of employee stock options and will delve into the terminology that defines the standards of stock option procedures. Read the rest of this entry »

Stock Option Taxation: A Quick Guide for Understanding

 

Don’t let taxes catch you off guard – Be prepared!

With all the various forms of employee stock options, we commonly hear questions concerning their taxation. When each option is taxed depends solely on the individual standards that each type of stock option has had set in place. In our recent video on taxation, we introduced a few of the common procedures that are used when determining what those stock option standards may be. First of all, it is important to point out that in the United States, there is no taxation of any form of equity when it is granted to you. The taxation that will occur is dependent upon the type of equity or stock option granted. Read the rest of this entry »

W-2 and Disqualifying Dispositions

What’s on your W-2?

Tax season is near and there are a few things all companies must know in order to be prepared. A qualifying disposition refers to the transferring, selling, gifting or exchanging of stock before the ISO has satisfied its holding period. But what is included in a W-2 in connection with a disqualifying disposition of shares acquired under incentive stock options?

According to My Stock Options, if incentive stock options are sold, gifted or transferred within one year of the exercise date or two years off the grant date, it is considered a Disqualifying Disposition. This happens because the employee is losing the tax benefits they would otherwise have with qualified dispositions if they had not sold, transferred or gifted the ISO. This, however, does not apply to incentive stock options that are transferred to a joint account with a spouse, transferred to a spouse in the event of a divorce, transferred from account to account (both owned by the recipient), or after the employee’s death. These are not considered dispositions.

How does this affect an employee’s W-2? If they decided to take the disqualifying disposition road, the company will report it on their W-2. Keep in mind that the company is also not required withholding Social Security taxes (FICA) if the employee purchases the stock or any income tax when they sell the stock. At this point, it is not considered capital gains and it is taxed as a regular income, which the employee is required to report on a W-2.

As described in Incentive Stock Options by William Perez, a disqualifying disposition can be taxed in two ways, “There will be compensation income (subject to ordinary income rates) and capital gain or loss (subject to the short-term or long-term capital gains rates).” Here are five steps to figure out the tax calculations of a disqualifying disposition.  Have questions about your stock options? We’d love to help! Contact us 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.

Image Credit: Phillip Taylor PT

Acquisition: What Happens After a Shift of Power? Part 5

A company merger or acquisition can be an intimidating process to endure as an employee. In parts one, two, three and four of this series we introduced various aspects of these events that are essential for understanding the future of your stock options.

How will your stock options exchange?

In our fifth installation, we will discuss the burning question most employees can’t wait to ask, “What will I get for my stock options?”  There are four common exchanges that could occur during a merge or acquisition. Today, we will delve deeper into the first two of the following four options throughout this post. In exchange for your stock options, you may receive: Read the rest of this entry »

Acquisition: What Happens After a Shift of Power? Part 3

Is your money on the line?

We have recently introduced a few of the procedures for moving forward with stock options in a merger or acquisition. In parts one and two, we discussed vested and unvested options, acceleration mechanics and events and also conveyed the importance of understanding your stock option plan or individual grant agreement.

In part three, we will answer your questions by introducing how the terms of your merger or acquisition could affect the future of your stock options.  While your individual documents should grant you some insight, the future of your stock options depends heavily on the terms of your company’s unique merger or acquisition.

Vested options: There are multiple things that could happen to vested options and the final outcomes will occur according to how the merger or acquisition is structured.  Vested options could:

  • Remain unchanged (company must remain intact)
  • Rolled over into options for the buyer
  • Turned into cash payment upon cancelation

According to MyStockOptions.com, “Sometimes companies provide a choice to employees: Vested options are either cashed out or swapped for vested options in the acquirer. Depending on the structure of the acquisition, you may have to exercise your options before the deal closes. Your stock plan may provide the board the power to force an exercise. If so, you would receive whatever your company’s shareholders receive (e.g., cash, acquirer’s stock, or a combination) in exchange for their stock.”

Unvested options: As we discussed in our previous posts, the future of unvested options in a merger or acquisition is often uncertain. The purchasing company could simply make an exchange of the company’s options for their own, leaving things relatively unchanged or a new grant could be offered. It is also common for the acquiring company to grant stock options under their traditional plan; these typically resemble the packages for new hires. It is also possible, but unlikely, for options to be cashed out.

There are still multiple aspects of a merger or acquisition to understand before being able to fully comprehend the future of your stock options. Check back in a few days for part four. We will dive deeper into the topics of deal factors, valuation and option conversion.

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: V1ctor.

Acquisition: What Happens After a Shift of Power?

What will you get in liquidation?

Changes occur in corporate America every day and as an employee these changes can be intimidating, especially when they are related to the future of stock options during a merger or acquisition. In this multi-post blog series we will attempt to answer the age old question of, “What happens to my stock options?” In part one, we will introduce the first steps in understanding how stock options can be affected in a merger or acquisition.

Know the terms of your options: When you are given an initial plan for your stock options, you are basically given all the information you could possibly need for reference. Your individual grant agreement and your individual stock option plan will be the two resources you turn to for the details needed to move forward after a merger or acquisition occurs. Read the rest of this entry »

Funding College with Stock Options

Will you stock options lead to a degree?

Getting a college education is not an easy feat, especially now with the price of college tuition on the climb every semester. Most parents pay for college either with money from a savings account or they take out a bank loan. In both cases the money that you’re investing in your child’s higher education will put you in debt or wipe you clean. Have you thought of using stock options to pay for college?

There is a possibility of paying for college with restricted stock, employee stock options, employee stock purchase plans and other grants. This can directly relate to your ability to keep your retirement savings untouched. But first things  first, understanding the Kiddie Tax. Established in 1986, this tax is imposed on children up to 17 years of age. If the child has an income that is more than an annually set threshold, the rest of the money is taxed at the guardian’s tax rate. This law was put in place so that guardians would not give their children large amounts of money in the form of stock options as a ‘gift’. This was done to stop a loophole that otherwise would allow adults to exercise an option and be taxed in a much lower tax bracket.

In 2006, due to the TIPRA Act  (Tax Increase Prevention and Reconciliation Act), the ages stated in the Kiddie Tax were changed and extended to children under 19 and full time college students under the age of 24.

So what else is there to know? How about the three tax credits? They are the American Opportunity Credit, the Lifetime Learning Tax Credit and the Hope Scholarship Credit. According to Troy Onink, the best type of credit a parent or guardian should choose is the American Opportunity Tax Credit. This is because of the first $2000 of tuition expenses that qualify, the amount of credit equals 100%. Plus,  25% of the next paid expenses of $2000. This makes it the best because it credits $2500 a year per each qualified student. That’s compared to the Lifetime Learning Tax Credit, which is $2000, and the Hope Scholarship Credit, which is only $1800.

There you have it, now you’ll be able to send your children to college and be able to keep funding your retirement plan. It can all be done with the use of stock options when funding your children’s higher education. If you have any questions about stock options or what strategies you can use, give us a call.

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!

Image Credit: NazarethCollege

I’m Getting a Divorce: What Happens to My Stock Options?

What’s mine is yours?

Although the treatment of stock options in divorce cases varies by state, it is important to understand the critical issues and legal trends that will affect how your assets are divided.

Stock options were not considered as assets to be divided in the marital estate until the early 1980s. Since then, different state courts have issued different rulings when it comes to considering stock options as marital assets in the overall property distribution. These courts have also come to different rulings regarding how to dispose of them if they are marital assets. Most courts consider stock options in the overall property distributions, but few have addressed whether these assets are income that can be used for the purpose of child support or alimony. Read the rest of this entry »

Restricted Stock – What Makes It Different?

Restricted Stock – What Makes It Different?

Restricted stock, not to be confused with restricted stock unit (RSU), is a type of stock that can be issued to any employee of the company. Restricted stock is also referred to as “letter stock” or “section 1244 stock” because of its regulations outlined by the SEC under section 1244 of the Internal Revenue Code. As its name implies, restricted stock has limitations attached to it when it is issued from the employer to the employee. Meaning, the stock is not fully transferable until certain conditions that are required have been met. Read the rest of this entry »

Crowdfunding Campaigns: How to Ensure Success

 

Has crowdfunding satisfied your money hunger?

Crowdfunding campaigns have the potential to give entrepreneurs and business hopefuls a substantial boost into their desired markets. With hundreds of thousands of failed crowdfunding attempts, it is essential to understand the appropriate steps that can make all the difference when it comes to the success of a campaign.

Pick an appropriate launch site: With hundreds of sites claiming to be “just what you need,” picking an online platform is especially important. Be sure to consider what type of venture you are funding and how you hope to discover investors. Read the rest of this entry »

Crowdfunding – Top 9 Online Resources Part One

 

Can you make your money grow?

Crowdfunding is one of the most innovative methods by which entrepreneurs are funding their business ventures, but with hundreds of sites claiming to assist in legitimate online funding, it can be tough to differentiate the real from the risky. In part one of this post we will introduce 5 of 9 websites that have known popularity and proven results.

1. Community Leader: This site is our favorite here at Stock Connections and we highly recommend it to all of our clients. This site features online videos and seminars to help businesses and investors learn more about the practice of crowdfunding. Their CrowdLeader application allows for the highest level of organization with task lists, investor profiles and direct chat features Read the rest of this entry »

Incentive Stock Options: Tax Return Tips and Tricks Part Two

Are you subject to AMT?

In our last blog post, we introduced basic tips for regular reporting procedures in relation to incentive stock options. In this blog post, we will delve deeper into the issue with an introduction to alternative minimum tax and relevant reporting standards. Let’s start by understanding the basics of the alternative minimum tax and who it applies to.

What is it? Alternative minimum tax is a system of taxation within the American tax system that was originally designed to keep the loop holes used by wealthy tax payers closed. These days, the alternative minimum tax expands taxable income and disallows common deductions within the middle class. Read the rest of this entry »

Incentive Stock Options: Tax Return Tips and Tricks Part One

 

Are your options fencing you in?

Tax season is upon us and with the variety of stock options being so plentiful, it is important to understand how to go about filing a tax return that fits the parameters of your stock option type. Today, we focus on incentive stock options and learn how to report all necessary tax information.

Incentive Stock Options: Grant – Keep in mind that if you have been granted incentive stock options but have not exercised the options, that there is nothing to report on a tax return and you have no obligation to report any data to the IRS in this way.

Incentive Stock Options: Exercise – If you exercise your incentive stock options and are not affected by the alternative minimum tax, then your requirements will remain unchanged. Additionally, an individual company will report all incentive stock options that are exercised in the past year on IRS form 3921 in the New Year.

Incentive Stock Options: Sale – Taxes on an incentive stock options sale, gift or transfer will be determined by holding periods or disqualifying dispositions. If you sold your shares after a predetermined holding period was fulfilled you can report your sale as though all transactions were conducted in the open market. Any capital gains and/or losses will be determined by calculating the difference between your exercise and sale prices. Keep in mind that any long term gains (held for 12 months or more) will be taxed 15%. A disqualifying disposition occurs if you get rid of your incentive stock option shares before fulfilling the incentive stock option holding period. There are ways to report this instance if you gifted, sold or transferred your incentive stock options to an individual that is not a direct relative. Please see below.

  • Did you make money? Were your shares sold at a rate higher than the original purchase price and the value of the shares at the time you exercised them? If you answered yes, then you must determine your income from that sale and report it as compensation income. Anything additional is considered a capital gain and must be reported as such.
  • Did you break even? If you sold your incentive stock option shares for more than you originally paid but for less than the value of the share at the time you exercised your options, then consider all profit to be compensation income and report that number and the sale on your 8949 tax form.
  • Did you lose money? If you lost money in the sale of your incentive stock option shares, report all losses as capital loss on the appropriate forms.

In our next blog post, we will continue our series on tax return tips and tricks by introducing alternative minimum taxes and how to properly calculate and report a qualifying tax rate.  Be sure to check back and let us know if we have helped you understand your incentive stock options and their associated reporting requirements.

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: Tax Credits

Stock Options: 10 Rules for Effective Planning – Part 2

Photo Credit: Helico

Last week we introduced five of the top ten rules that every individual with stock options should be aware of when making their financial plans. This week we explore the remaining five rules.

They are:

Rule 6 – Know your tax bracket and watch for changes:  The six tax brackets are determined by multiple factors including your income and marginal tax rates. Be sure to find your tax bracket and understand your tax rates as well as any potential changes that could happen throughout the year. Read the rest of this entry »

Retirement Planning – How Will Tax Rates Affect My Plan?

Photo Credit: Images_of_money

Retirement is something everyone in the workforce eventually hopes or plans for, but with definite changes to our tax system and new tax rates coming down the line, it is more important than ever to understand how the effects of these landscape changes could impact your investments and plans for the future.

There are six tax brackets in the U.S tax system and they are divided according to marginal tax rate and annual income.  Each of these six brackets and their tax rates will be affected by changes in 2013. Read the rest of this entry »

Strategy for Employee Stock Purchase Plans in 2012

We recently explained that the Bush tax cuts will be ending at the end of this year. With the expiration of these rates approaching so quickly upon us, changes in future taxation has led us to urge those with employee stock purchase plans to take great care in creating a year-end strategy for moving forward in the New Year.

There are various aspects to take into consideration when planning for the future of your employee stock purchase plans. Please keep in mind, however, that an increase in tax rates should not be the only reason to plan for a sale of stocks. The following are a few of the factors to consider when devising strategy for your employee stock purchase plans: Read the rest of this entry »

5 Tax Return Mistakes to Avoid in 2012 – Part 1

photo credit: x_JamesMorris

The 2012 tax season has the potential to be more confusing than most, especially if you sold any stock last year. Even if you hire a tax specialist to handle your tax return, you can benefit from knowing some of the basic income tax reporting mistakes to avoid. In this blog post, we’ll outline three common tax return mistakes you should stay away from. Read the rest of this entry »

Stock Options – How to Avoid Common Mistakes

 

Photo Credit: Tax Credits

Stock options have the potential to show great reward and gain for employees who value them and are responsible with their grants. The end result of your stock option experience is directly dependent upon the amount of attention that is shown to the relevant details. Keep in mind that changes in the environment and in the climate can affect the value of your stock options.

There are a series of common occurrences that could impact your stock options. Be sure to educate yourself on these events so you can properly plan for your financial future. Your stock option agreement should have all the necessary information to further prepare yourself for the following situations, should they ever occur.

They are:

Termination: No one enjoys getting the boot at work, but if for some reason your employment is ended, it will be good to know how your personal stock options could be affected. Take this into consideration when questioning your employment.

Disability: Depending on your equity compensation plan and your individual stock options, your grants could be affected if you are unable to work due to injury or disability.

Market changes: A fluctuation in the stock market is to be expected; the value of stock options will commonly increase and decrease according to the market climate and can affect your exercise and sale timing. Your documents will have detailed information on your exercise options.

Divorce: Division of marital assets is not always something you can plan for. However, you can make yourself aware of your choices if the situation ever does occur.

Taxes: As with any equity compensation plan, there are specialized procedures for taxation. Each stock option will have various taxations, and in order to properly plan for any additional taxation or change in taxes, employees must be aware of the rules and standards set in place in relation to their equity compensations.

Change of control: Any shift of power, whether it be a merger or an acquisition can greatly affect a stock option plan and an employee’s options for exercise etc. Being familiar with the plan will prepare a stockholder for any change that may alter their options and will explain what they are able to do with their shares during a shift in power.

Here at Stock Connections, we specialize in equity compensation plans.  If you have any questions, we can help. Give us a call!

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!

 

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