What You Should Know to Decide If Your Equity Grant is Fair?

Employee stock option is a great strategy adopted by employers for attracting and retaining talent, especially in a startup or venture-backed firm in today’s times.

But, when it comes to employee stock options, these vary from one form of stock compensation to another and the basic reason behind it is that most organizations provide employees these in place of remuneration or monetary compensation.

While most people could get thrilled with the idea of being presented with a stock grant and gaining financially in the future, these also come with several considerations and snags that they must be aware of. Below appended are some clauses that you need to be aware of as a recipient of stock options:

1. Vesting

Vesting is not a tricky clause and the vesting period is for a certain period in years. Some plans have a cliff of 12 months for first vesting and also have monthly and quarterly vesting. There are some other plans of vesting that have annual vesting. So read about all these before accepting the agreement.

2. Exercise

After vesting and also before expiry you have the option of exercising any time by paying the strike price.  But, you also need to know that some startups don’t allow you to exercise your vested options and have a clause that says the cashless settlement will be done upon exit and those startups also don’t want the hassle of dealing with a large number of the shareholder. Keep an eye on all these conditions before taking a decision.

3. What is the Strike Price? And how does it impact you?

Generally, the strike price is the current market place, but usually it’s a slight lower than the current market price. Periodic adjustment is made, but the reality is there’s a lag. If the strike price is less than the market price at the time of grant then the value of the grant is less than the strike price.

4. What are pre-money and post-money and what are the implications?

Pre-money and post-money don’t impact you as an employee to a great deal. First you should figure out that the post-money value of a startup equals the sum of the pre-money value of the startup.

5. What happens when you quit?

Most startups expect you to exercise all your vested options within few months and this can be financially inconvenient especially when the current market value is higher than the strike price. Some startups allow you to exercise vested options any time before expiry and separation.

6. In the event of a change in control, what happens to the unvested options?

It depends upon the terms of the agreement between the merger and acquisition and the unvested options may be yield or converted into equivalent options of the acquiring company.

If you have decided to work for a startup then first you need to take a strategic view of compensation and the strategic view involves computing earning over a longer time and taking some risks and at this time no one can help you assess your risks better than yourself.

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Your Checklist Related to Incentive Stock Options That Will Help You Make Informed Decisions

Incentive Stock Options (ISO) equip employees with more favourable tax benefits than non-qualified stock options. An individual who exercises a non-qualified stock option must pay required income taxes on the excess of the fair market value of the underlying shares.

An employee is subjected to no income tax at grant or on the exercise of an ISO and the profit acquired made on the sale of the shares is taxed as long-term capital gain.

From the employer’s perception, ISO is less beneficial than non-qualified employee stock options, because the employer is not entitled to a tax deduction on an employee's exercise of an ISO if the employee meets the above holding necessities.

Given below is a guide on checklist that defines the qualification of an option as an ISO. You must create a checklist of following aspects to understand ISO better:

• The terms of the option must not reflect that the option will not be served as an ISO.
• The option must be given to an individual in connection with that person's employment by the corporation that is supposed to grant the option.
• The option must be for the purchase of stock of the employer or a related enterprise.
• The shareholders must grant the option within 12 months before or after the date the plan is selected by the corporation. Not only this, it must be granted under a formal plan which may be either written or present in electronic form.
• The plan under which the ISO is granted must cover the things which are given below:

1. The maximum number of shares which may be issued through the exercise of ISOs.
2. The potential employees who are eligible to receive options or other stock-based benefits under the plan (and if non-employees become eligible to acquire awards under the plan, the plan must specifically indicate the employees or class of employees eligible to receive ISOs).

• The option must be granted within ten years from the earlier of: the date the plan was chosen; or the date the plan was sanctioned by shareholders.
• The regulations of the option must indicate that the option is not exercisable beyond ten years after the date the option was granted (or five years after the option was granted to an employee who has shares accounting for 10% or more of the total combined voting power of all classes of stock of the company, its parent or its subsidiary (10% shareholder)).
• The exercise price of the option must not be less than

1. The reasonable market value of the implicit shares on the grant date for employees who are not 10% shareholders; or
2. 110% of the fair market value of the underlying shares on the grant date for employees who are 10% shareholders.

• The terms of the option must include:

1. Prohibition of transfer of the option by the employee, other than by will or the laws of descent and distribution.
2. Gives the liberty of exercising the option only by the employee.

Keeping these aspects in mind and the exercise stock options tax rules and conditions, you should be able to make the most of your options for befitting return on investment.

If you are in doubt or are not certain how to utilise the opportunities related to your employee stock options, taxation issues associated with them then it is better to consult a financial professional in the domain.

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Posted in: employee stock options,employee stock options taxation,exercise stock options tax

5 Common Questions You Should Ask When Receiving Employee Stock Options in a Start-Up

ESO is defined as the employee stock option which is granted to an employee of the firm, as a kind of reward or remuneration for their outstanding professional work. If you are someone who is provided with employee stock options in a start-up company, you can reduce the chances of risk and boost returns by utilizing advanced strategies that consist of selling calls and buying puts on the company stock.

Stock options can be an advantageous option, but the value of the proposed offer can vary significantly. There are simply no guarantees. So, whether you are considering a job offer that includes a stock grant, or you hold the stock as part of your current compensation, it’s essential to understand the basics. Few important and common questions you need to know put forward to the employer about start-up employee stock options are mentioned below:

1. What are the two most fundamental types of employee stock offerings?

Two of the most common employee stock offerings are stock options and restricted stock. Employee stock options are the most widespread among start-up companies. The possibilities give the opportunity to purchase company's stock at a pre-determined price, typically referred to as the “strike” price. Your right to purchase – or “exercise” – stock options is subject to a vesting schedule, which defines when you can exercise the options.

Restricted stock grants bestow employees with a right to receive shares at minimum cost. But these stock grants are subject to a vesting schedule, typically tied to either passage of time or achievement of a specific goal.

2. What is the difference between ‘incentive’ and ‘non-qualified stock options”?

Incentive stock options (ISO) qualify for special treatment by the IRS; it means taxes don’t have to be paid when these options are exercised. You also need to be fully aware of the ISO tax form and other related information to make informed choices when exercising.

Whereas, non-qualified stock options (NSO) includes ordinary taxable process when exercised. Tax is dependent on the difference between the exercise price and the fair market value at the time of exercise.

3. What about taxes?

Tax treatment for each transaction will be based on the type of stock option you have and other factors associated with your situation. Before you exercise your options and sell shares, you’ll want to consider the consequences of the transaction diligently. For particular advice or suggestion, you can consult a tax advisor or accountant.

4. How will I come to know whether to hold or sell after I exercise?

When it comes to employee stock options and shares, the decision to hold or sell comes to the basics of long-term investing. Before exercising, keeping or selling some or all of your shares you should consider questions that are mentioned below:

• How much risk am I willing to take?
• Is my portfolio well-diversified based on my current needs and goals?
• How does this investment fit in with my overall financial strategy?

5. How much of my company’s stock should I own?

It’s good to have faith in your employer, but uncertainties are everywhere. Before making any investment, you should consider your total portfolio and overall diversification strategy. Usually, it’s not supposed to be a great idea to have portfolio that is overly dependent on any one investment.

For employee stock options, your manager or some executive in your company’s HR department can give you more details about your company’s plan and the benefits you qualify for under the program. A seeker should also consult financial planner or tax advisor to make sure that you have got all the details regarding how stock grants work, vesting events, exercising and selling affect your tax situation and how to defer NSO tax.

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Posted in: defer NSO tax,iso tax form

What You Need to Know About Some Vital Keys and Terms of NSO Stock Options

Employee Stock Options (ESOs) offer the option holder the right to buy a certain amount of company shares at a predetermined price for a specific period of time. It is classified into two parts that are- NSO (non-qualified stock options) and ISO (incentive stock options). Here, we will discuss NSO stock options.

NSO stock options are stock options which do not possess special treatment like those accorded to incentive stock options. As it is obvious from the name, non-qualified stock options represent an offer to the employee by the employer to purchase company stock at a price which tends to be generally below the current market price. Its key terms and conditions are mentioned below:

1. Grant date: The date on which the company grants an employee permission to buy a specific number of shares at a pre-determined price within a set period of time.
2. Exercise date: The date on which the employee exercises his or her right to buy the shares at the exercise price and effects a purchase transaction. These first two dates are those on which a taxable event occurs for NSOs.
3. Exercise price: The price at which the employee can buy the stock in the plan. This price is supposed to be lower than the market value, and companies usually set the price based upon a set discount formula from its current market price. However, it is possible for the stock price to go below the exercise price, at which options become worthless because no employee would ever want to buy the stock price above the existing market value.
4. Sale date: The second taxable event in the NSO process. This is the date on which the employee sells the stock.
5. Expiration date: The date on which the offer extended at the grant date to exercise the options terminates.
6. Bargain element: The amount of profit that an employee gets when they exercise their options. This amount equals the difference between the exercise value and the current market value.

The key terms which are important for NSO stock options are evident now. Before buying stock options, one should enlist the advantages which will be given to the buyer, such as- increased income, tax deductions, tax deferral, and improvement in employee’s tenure and morale.

When it comes to cashing out stock options, then the favorable situation is that an employee should hold the stocks until the price rises to a favorable price, then list the stocks for sale. But considering this only will not help you maximize your returns. There are a lot of other factors accompanying stock options that must be considered by the holder for a fruitful result.

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Posted in: Cashing Out Stock Options,NSO stock options

10-Point Checklist for an Employee When Accepting Employee Stock Option Offer

Employees in today’s times are not dependent on the weekly salaries only, as more and more companies (especially venture-backed and startups) offer compensation to talented people in the form of stock options as well. 

These employee stock options (ESO) give a right, not the obligation, to the employees to own a certain stake in a firm, in the form of shares, based on the agreed price. These shares can be sold by them at a later stage, specific to established conditions, to gain financial gain. 

While, in the hindsight, it can be seen as an easy and profitable option, but employee stock options do come with their fair share of complications. Therefore, the employees are advised to proceed through carefully before accepting the terms of the stock options. Below, we have created a checklist that each and every employee needs to go through when finalizing the ESO agreement with the employer:

1. Is the stock option a viable and profitable to you, relative to your long-term financial gains? Are there any alternative compensation options that you can get which could prove to be more profitable?
2. Will company’s stocks rise in the future, or do you see the potential loss in that? While this may seem uncertain at the moment, assessing and evaluating the company’s value may help you make an informed choice.
3. Will the management execute increased scrutiny of your performance due to our vested interest in the firm’s profitability?
4. Will the company’s valuation get affected by incorporating minority shareholders’ interests?
5. What accounting process will the company use to book stock options’ value and taxation of discounted options?
6. Will your stock option plan need to be approved by the shareholders? 
7. What is the limit of the number of the stocks reserved for issuance?
8. Will you be able to buy shares during the condition when an option holder leaves the firm?
9. What will happen to the stocks' vesting conditions if the firm goes through a change in management or control?
10. What is the taxation conditions, especially Alternate Minimum Tax (AMT)?

Go through the exact terms of the agreement thoroughly understanding each and every condition. If there is any doubt regarding any subject related to Incentive Stock Options (ISO), Non-qualified (NSO) Stock Options, taxation, or any other condition, do not hesitate to discuss that thoroughly with your employer.

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Posted in: employee stock option plans employee stock options,ESO,exercising employee stock options,loan to exercise stock options,NSO stock options