Masterclass Listing

• Agenda
  • Session 1
    • Overview
    • Restricted Stock Awards (RSAs) and Restricted Stock Units (RSUs)
    • Employee Stock Purchase Plans (ESPPs)
  • Session 2
    • Nonqualified Stock Options (NQSOs)
    • Incentive Stock Options (ISOs)
  • Session 3
    • Exercise Strategies
    • Tax Reporting
    • Termination Events
  • Session 4
    • Private Company Issues
    • Other Equity Awards
    • Net Unrealized Appreciation (NUA)
• Types of Equity Awards
  • Stock Options—NQSOs and ISOs
  • Restricted Stock—RSAs and RSUs
  • ESPPs
  • Stock Appreciation Rights (SARs) and Phantom Stock
  • Profits Interests
• Discussion Topics
  • Features of Awards—terms and conditions for each type of award
  • Taxation—consequences at grant, exercise and sale
  • Strategies—timing for exercise of options
  • Termination and Job and Life Events—treatment of each type of award at each event
  • Other Considerations
• Documents—importance of gathering essential documents
  • Plan Document—general terms and conditions
  • Award agreement—specific terms of award
  • Client statements—summary of awards
  • Employment Agreement—usually for top executives
  • Tax returns—helps to gauge tax considerations
• Public vs Private Company
  • Liquidity—primary difference between public and private
  • Valuation—challenge with private companies
  • Types of Awards—trend from options to RSUs as company matures
  • Strategies—different focus with private vs public
  • Entity type—can impact type of awards

Restricted Shares and RSUs

• Key features
  • How are awards restricted—compare to restricted securities
  • Full value award—no exercise price
  • When are awards taxed—at vesting and sale
• Restricted Stock Awards (RSAs)
  • Stock issued at grant
  • Voting rights and dividends
  • No ability to deferral
  • Potential 83(b) election—accelerate taxation to grant
• Restricted Stock Units (RSUs)
  • Common in public companies—predominant type of award
  • When is stock issued—at release as opposed to grant
  • Vesting—service-based, performance, double trigger
  • Voting rights and dividends—dividend equivalents
  • No 83(b) election
  • Potential deferral—strict rules under 409A
  • Potential 83i deferral—rare benefit
• Taxation
  • At grant—83(b) election for RSAs but not RSUs
  • At vesting/release—full value as W-2 income
  • Withholding obligation--usually with shares—make sure sufficient
  • At sale--short or long-term capital gain or loss
  • Tax reporting—W-2/1099-B/cost basis issues
  • Private company double-trigger RSUs
• Performance Shares (PSUs)
  • Award recipients—tend to be executives
  • Performance determines payout—can be at different levels
  • Types of performance measures—flexible criteria
  • Taxation—similar to RSUs

ESPPs

• Key features
  • Qualified 423 vs Non-qualified
  • Post-tax salary reduction for offering period/purchase period
  • $25,000 limit—examples of how calculated
  • Discount up to 15%
  • Purchase price—lookback feature
  • Tax consequences upon sale—qualifying vs disqualifying disposition
  • Terminology
• Taxation
  • No taxation at purchase—data on Form 3922
  • Taxation upon sale—W-2 income/short or long-term capital gain/no withholding or FICA
  • Disqualifying disposition with examples
  • Qualifying disposition with examples
  • Non-qualified ESPP taxed like NQSO

Restricted Stock/RSUs vs Stock Options

• Determining value
  • RSUs—at vest
  • Options—stock FMV over exercise price
• Payment
  • RSUs—none
  • Options—pay exercise price
• Dividends/Voting rights
  • Upon grant only with restricted shares—not RSUs
  • Only after exercise option
• Ownership
  • Own restricted shares at grant—RSUs upon vest
  • Own options upon exercise
• Taxation
  • At vest for restricted shares/RSUs unless 83(b) election for restricted shares
  • At exercise for NQSOs and for ISOs—AMT at exercise, income taxation at sale

Stock Option Features

• Two types—NQSOs and ISOs
• Grant of right to purchase underlying stock
• Exercise right to buy number of shares at exercise price for set period
• Exercise upon vesting—may have early exercise in private companies
• Vesting features—right but not obligation to purchase shares
• Exercise methods—cash, cashless, sell-to-cover
• Own shares upon exercise
• Termination triggers post-termination rules

NQSOs

• Can be granted to employees, directors and consultants
• No favorable tax treatment
• Spread at exercise W-2 ordinary income
• Withholding for federal, state and FICA
• Capital gain/loss on sale-1099-B
• Examples of taxation

ISOs

• Only grant to employees
• $100,000 limit
• Preferential tax treatment
• AMT on spread at exercise
• Qualifying vs disqualifying disposition—examples
• No withholding/FICA taxes

Considerations at Grant and Exercise 

• Public vs private company
• NQSOs vs ISOs
• Additional grants
• Insider trading and ownership guidelines—mainly applies to executives
• Exercise methods available
  • Cash
  • Cashless/sell to cover
  • Net exercise
  • Note/third party funding
  • Stock swap
• Personal factors
  • Liquidity
  • Investment risk
  • Intrinsic value
  • Time until expiration
  • Tax situation—ordinary income and withholding for NQSOs/AMT for ISOs
  • Concentrated position
• NQSO Exercise
  • Strategies
  • No tax advantage
  • Exercise and hold
  • Cashless/sell to cover
  • Stock swap--example
• ISO Exercise
  • Strategies
  • Tax advantaged
  • AMT considerations
  • Timing of exercise
  • Stock swap--example 

Tax Reporting

• Forms for compensation
• Forms for sale
• Forms for exercise/purchase
• AMT reporting
• Tracking cost basis

Termination Events

• Life events
  • Death
  • Disability
  • Divorce
• Job events
  • Voluntary/involuntary termination
  • Termination for cause/good reason
  • Retirement
  • Mobility issues
• Post-termination exercise considerations
• Change of control
  • Treatment of awards
  • Taxation
  • Golden parachutes
• Public vs private companies

Private Company Features

• Lack of liquidity
• Valuation issues—409A
• ISOs more common
• Early exercise/83(b) election—strategies for NQSOs and ISOs
• Double-trigger RSUs
• QSBS considerations
• Exercise alternatives--cash, loan, financing
• Liquidity programs--tender offer, private markets, share repurchase
• Non-corporate entities--profits interests

Other Equity Awards

• SARs
• Phantom Stock
• Profits Interests

NUA

• Company stock in employer plan—401(k), ESOP, profit sharing
• Strategy—low basis/highly appreciated stock
• Need triggering event/lump sum distribution
  • Attaining 59 ½
  • Separation from service
  • Death
  • Disability
• Taxation upon distribution and sale
  • Cost basis—potential 10% penalty if under 59 1/2
  • Appreciation within plan--LTCG
  • Appreciation after distribution—STCG/LTCG
  • Example
• Treatment of after-tax contributions
• Private company NUA issues

Checklists

• Restricted stock and RSUs
• Stock options
• ESPP
• Private company equity awards
• Termination of employment
• Common mistakes