Employee equity incentives
Upcoming SlideShare
Loading in...5
×
 

Employee equity incentives

on

  • 1,493 views

 

Statistics

Views

Total Views
1,493
Views on SlideShare
1,493
Embed Views
0

Actions

Likes
1
Downloads
28
Comments
0

0 Embeds 0

No embeds

Accessibility

Categories

Upload Details

Uploaded via

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

    Employee equity incentives Employee equity incentives Presentation Transcript

    • Employee Equity Incentives Presented by Bart Greenberg Haynes and Boone, LLP Tech Coast Venture Network Monthly Workshop Series May 5, 2011© 2010 Haynes and Boone, LLP
    • What Considerations Typically Influence Plan Design?June 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Business Purpose for the Plan  Recruit and retain scarce talent  Motivate employees to perform  Align employee interests with owners  Create a compensation “fill-gap”  Facilitate succession planningJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Ownership and Management  What is the current ownership structure of the Company?  Are these owners willing to dilute their ownership position?  Is voting control an issue?  How will the extension of equity be viewed by the existing management?June 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Legal Form of the Company  Sole Proprietorship  Partnership  General  Limited  Corporation  S Corporation  C Corporation  Limited Liability Company  Limited Liability Partnership  Professional BusinessesJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Capital Needs of the Company  Does the Company need capital?  Will the Company be seeking outside investors?  How would prospective investors view the plan?June 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Company’s Financial Situation  What is the financial condition of the Company?  Is the Company generating profits?  What is the cash position of the Company?  Will it be cost effective for the Company to implement and administer the plan?  What are the costs to the Company?  What are the costs to the employee?  How will the proposed plan affect the Company’s financial statements?June 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Future Growth Plans  What is the growth projection for the Company?  Start-up with great growth potential  Mature company with slower growth  How will liquidity of the investment be obtained?  Cash award or redemption  Liquidity event of CompanyJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Company Culture  What is the Company’s culture?  Individual-based compensation approach; or  Broad-based compensation approach  How will the plan be perceived by employees?  Is it designed to reinforce the Company culture?  Will it be perceived by employees as being fair?June 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Industry Norms  Employee desires, expectations and needs  What is the competitive landscape?June 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Tax Considerations  What are the available tax incentives for the Company?  Deductibility of the award  Obligation to withhold  What are the available tax incentives for the Employee?  Will there be recognition of income?  Capacity to pay withholding obligations  Compensation income vs. capital gainsJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Tax Considerations (cont.)  Pitfalls to avoid  Deferred compensation taxation (Section 409A)  Parachute payment taxation (Section 280G)June 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Specific Plan Design IssuesJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Types of Plans  Direct Stock Purchases  Stock Options  Phantom Stock and Share Appreciation RightsJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Direct Stock PurchasesJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Eligibility and Participation  Typically, individual-based approach  Potentially, broad-based approach via stock purchase planJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Size of Grant  Typically, case by case  Could be limited by securities requirements  Section 25102(o) limits pools to 30% of outstanding shares unless approved by 2/3 of outstanding shares  Rule 701 limits aggregate sales price or amount of securities being sold in reliance on Rule 701 during any 12 month period to:  $1 million (aggregate exercise price on date of grant);  15% of total assets; or  15% of outstanding securitiesJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Size of Grant (cont.)  Could be limited by other concerns  Carve-outs to application of anti-dilution provisions  Exceptions to preemptive and other similar rightsJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Type of Grant  Unrestricted  Not subject to forfeiture  Restricted  Subject to forfeitureJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Tax Treatment  Unrestricted  Ordinary income to the extent FMV exceeds purchase price  The Company has a reciprocal compensation deduction  Any profit at sale will be afforded capital gains treatmentJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Tax Treatment (cont.)  Restricted  Recognition of ordinary income as and when restrictions lapse  If, however, Section 83(b) election is made, see “Unrestricted”June 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Payment of Purchase Price  All cash  All note  If permitted pursuant to a stock purchase plan; or  If adequately secured by collateral other than shares  Sarbanes-Oxley prohibition on loans to top- level officers should be consideredJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Payment of Purchase Price (cont.)  Combination of any of the above  Other types of legal consideration  Labor or Services Actually Rendered  Debts or Securities Cancelled  Tangible or Intangible Property  Section 83(b) election may be challenged if significant portion of payment (typically 80% or more) consists of a nonrecourse noteJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Vesting  Passage of Time  Performance Based  Individual Performance  Company Performance  Combination of Time and Performance Vesting  Acceleration of Vesting  Determination of Triggers  Accounting ConsiderationsJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Purchase Price  Subject to securities requirements and tax issues, no restrictionsJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Voting Rights  Full voting rights at time of purchase  Consider protective provisions  Tag-a-long rights  Drag-a-long rights  Potential limitations on voting rights  Use of non-voting stock  Grant of revocable or irrevocable proxy  Use of shareholders’ or voting agreementJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Securities Requirements & Filings  If individual-based approach, could be subject to investor suitability requirements  If broad-based approach and subject to Section 25102(o), plan could must provide for delivery by Company of annual financial statementsJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Securities Requirements & Filings (cont.)  Rule 701 requires additional disclosure (plan summary, risk factors and financials) if sales exceed $5 million during any 12 consecutive monthsJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Stock OptionsJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Eligibility and Participation  A broad-based approach through use of plan  Potentially, individual-based approach through:  Limited grants of options under plan  Grant of options outside of any planJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Size of Option Pool  Typically, case by case  Could be limited by securities requirements  Section 25102(o) limits pools to 30% of outstanding shares unless approved by 2/3 of outstanding shares  Rule 701 limits aggregate sales price or amount of securities being sold in reliance on Rule 701 during any 12 month period to:  $1 million (aggregate exercise price on date of grant);  15% of total assets; or  15% of outstanding securitiesJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Size of Option Pool (cont.)  Could be limited by other concerns  Carve-outs to application of anti-dilution provisions  Exceptions to preemptive and other similar rightsJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Size of Option Grant  Typically, left to the discretion of the boardJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Type of Options  Incentive stock options  Grantee must be an employee  Exercise price must be > FMV  Other statutory requirements  Nonqualified stock options  Any option other than an incentive stock optionJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Tax Treatment  Incentive stock options  No tax deduction for the Company at grant or exercise  Capital gains treatment to optionee upon sale of stock  Potential AMT liability to optionee at time of exercise  In the event of a disqualifying event, see Nonqualified stock optionsJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Tax Treatment (cont.)  Nonqualified stock options  Tax deduction at exercise in amount equal to “spread”  Ordinary income to optionee in amount of spread at exercise  Potential ordinary income at grant if negligible exercise priceJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Tax Treatment (cont.)  [Potentially] subject to deferred compensation taxation (accelerated taxation, interest charge and 20% excise tax) if exercise price < FMVJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Exercise Price  Incentive stock option  Must be FMV at time of grant (110% if 10% shareholder)  Nonqualified stock option  For tax purposes, no restriction (however, may be subject to deferred compensation taxation under Section 409A if < FMV)June 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Vesting  Passage of Time  Performance Based  Individual Performance  Company PerformanceJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Vesting (cont.)  Combination of Time and Performance Vesting  Acceleration of Vesting  Definition of Triggers  Accounting ConsiderationsJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Term and Termination  Incentive stock options  No option may be granted after 10th anniversary of Plan  Limitations on periods after termination of employment by which option must be exercised  Nonqualified stock options  Section 25102(o) provides that no option may be granted after 10th anniversary of Plan  Section 25102(o) limits periods of time by which option must be exercisedJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Payment of Shares  All cash  All note  If permitted pursuant to a stock option plan; or  If adequately secured by collateral other than shares  Sarbanes-Oxley prohibition on loans to top- level officers should be consideredJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Payment of Shares (cont.)  Other types of legal consideration  Labor or Services Actually Rendered  Debts or Securities Cancelled  Surrender of Option Shares  Tangible or Intangible PropertyJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Voting Rights  Full voting rights at time of purchase  Consider protective provisions  Tag-a-long rights  Drag-a-long rights  Potential limitations on voting rights  Use of non-voting stock  Grant of revocable or irrevocable proxy  Use of shareholders’ or voting agreementJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Securities Requirements & Filings  If individual-based approach, could be subject to investor suitability requirements  If broad-based approach and subject to Section 25102(o), plan must provide for delivery by Company of annual financial statementsJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Securities Requirements & Filings (cont.)  Rule 701 requires additional disclosure (plan summary, risk factors and financials) if sales exceed $5 million during any 12 consecutive months  The number of option holders should be closely watched so that the company does not trigger reporting requirements when the exercises occur.June 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Phantom Stock and Share Appreciation RightsJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Eligibility and Participation  Typically, individual-based approach  Potentially, broad-based approach through planJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Size of Grant  No restrictionsJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Tax Treatment  Company has tax deduction on date of payment in amount equal to appreciation  Ordinary income to employee at time of payment  Deferred compensation taxation (accelerated taxation, interest charge and 20% excise tax) may applyJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Accounting Treatment  Benefits must be entered as an expense and book liability for accounting purposes when and as accruedJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • “Exercise Price”  No restrictionsJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • “Payment for Shares”  No actual payment is made  Employee receives cash award equal to difference between unit value and FMVJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Voting Rights  NoneJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Securities Requirements & Filings  In general, as no equity is involved, securities laws are not applicable  However, there is a new trend to settle with shares, not cash, which raises security law issuesJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Questions?June 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP
    • Thank you! Bart Greenberg Haynes and Boone, LLP (949) 202-3037 bart.greenberg@haynesboone.comJune 3, 2010 Employee Equity Incentives© 2010 Haynes and Boone, LLP