Slides from a presentation done on December 15, 2015 in San Francisco. The workshop covered general tax strategy and specifics around dealing with ISOs, NSOs, RSUS, and other forms of equity based compensation from a tax perspective, including how exercising under various scenarios affects ordinary income, capital gain taxes and the Alternative Minimum Tax (AMT).

1. Tax Strategy for
Incentive Stock Options (ISOs)
Equity Based Compensation

2. About Us
2
Investment
Management Tax Strategy

3. Contents
• Fundamentals
• Equity Based Compensation Strategies
• ISOs
• RSUs
• NSOs
• Tax Efficiency
• Q&A

4. Fundamentals: Principles of Tax Strategy
Avoid Defer
Reclassify Shift
Tax Strategy

5. Fundamentals: Tax Efficiency
Tax Efficient Investors =
Pay the least amount in taxes possible given their unique situation.

6. Why is Tax Strategy & Tax Efficiency important?
8%
55%
0%
10%
20%
30%
40%
50%
60%
Historical U.S. Stock Market Return
(Approx)
Highest Combined Marginal Tax Rate of
High-net-Worth Investors in California
(Approx)

7. Fundamentals: Tax Treatment of Income
Tax Treatment Examples
Ordinary Income Taxes
• Salary
• Interest
• Short-term Capital Gains
Long -Term Capital Gain Taxes
• Stocks & Bonds
• Real Estate
• Business Sales
7

8. Fundamentals:
Ordinary Income Tax Rates
Rate Single Married Filing Jointly
10% Up to $9,225 Up to $18,450
15% $9,226 to $37,450 $18,451 to $74,900
25% $37,451 to $90,750 $74,901 to $151,200
28% $90,751 to $189,300 $151,201 to $230,450
33% $189,301 to $411,500 $230,451 to $411,500
35% $411,501 to $413,200 $405,101 to $457,600
39.6% $413,201 or more $464,850 or more
Federal 2015:
8

9. Fundamentals:
Ordinary Income Tax Rates
Rate Single
1% Up to $7850
2% $7,850 to $18,610
4% $18,610 to $29,372
6% $29,372 to $40,773
8% $40,773 to $51,530
9.3% $51,530 to $263,222
10.3% $263,222 to $315,866
11.3% $315,866 to $526,443
12.3% $526,443 and over
California 2015:
Rate Married Filing Jointly
1% Up to $15,700
2% $15,700 to $37,220
4% $37,220 to $58,744
6% $58,744 to $81,546
8% $81,546 to $103,060
9.3% $103,060 to $526,444
10.3% $526,444 to $631,732
11.3% $631,732 to $1,052,886
12.3% $1,052,886 and over
9

10. Fundamentals:
Capital Gains Tax Rates
Ordinary Income Tax Rate Capital Gains Rate
10%, 15% 0%
25%, 28%, 33%, 35% 15%
39.6% 20%
Federal 2015:
California has no “capital gains rate”; it treats all income as ordinary income
10

11. Fundamentals:
Other Taxes
Federal 2015:
Additional Medicare Tax: 0.9%
• Wages, compensation, and self-employment income
Additional Net Investment Income Tax (NIIT): 3.8%
• Capital gains, dividends, interest, rental income
Filing Status AGI Threshold Amount
Single $200,000
Married Filing Jointly $250,000
California 2015:
• Additional 1% surcharge for mental health services applies to taxable income in
excess of $1,000,000
11

12. Fundamentals: Two Methods of Calculating Taxes
AMT MethodRegular Method
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12

13. Fundamentals: Tax Basics
Income
-Adjustments to Income
Adjusted Gross Income (AGI)
-Exemptions
-Deductions
Taxable Income
“Regular” Method
Taxable Income
+ “Preference Items”
- AMT Standard Exemption
AMT Taxable Income
“AMT” Method

14. Equity Based Compensation - definitions
14
Various forms of equity based compensation for tech employees…
Type Summary
Incentive Stock Options
(ISOs)
• Contract to buy stock at a specified price; no tax on
paper gain when exercised under the regular method
Restricted Stock Units
(RSUs)
• Stock grants vested over a number of years. Equivalent
to cash compensation in the eyes of the IRS.
Non-Qualified Stock
Options (NSOs)
• Contract to buy stock at a specified price; treated as
cash compensation when exercised (like RSUs)
Employee Stock Purchase
Plan (ESPP)
• Allows employees to purchase stock at a discount (e.g.
15%)

15. Favorable Tax Treatment
15
You want LT Capital Gains, but the benefit is not as good as you might think…
Ordinary income/Short-Term Capital Gains
Federal: +39.6% + 1.2% (deduction phase-out)
California: +8.0% (after-deduction)
Affordable Care Act: +3.8%
52.6%
Long-Term Capital Gains
Federal: +20%
California: +13.3%*
Affordable Care Act:+3.8%
37.1%
Difference = 15.5%
*Would be reduced if AMT does not apply
Reclassify

16. Incentive Stock Options
Granted Exercised Sold
Bargain Element
(Spread) = P2 – P1
Price
P3 – P2
P3 – P1
P1
P2
P3
Time 16
Exercise & Hold may
trigger AMT
Always taxed on this. Question is which type of tax:
Ordinary Rates, AMT, LT/ST Capital Gains

17. Fundamentals: Tax Basics
Income
-Adjustments to Income
Adjusted Gross Income (AGI)
-Exemptions
-Deductions
Taxable Income
“Regular” Method
Taxable Income
+”Preference Items”
- AMT Standard Exemption
AMT Taxable Income
“AMT” Method
Bargain Element of ISOs.
Strategy: Exercise enough
options so that Regular Method =
AMT Method (or close to it)

18. Strategy for Options
18
Current Stock Price = $10
Scenario 1:
Strike Price = $50
(“way out of the money”)
Hold on and hope
the stock bounces back
Scenario 2:
Strike Price = $9
(“a little in the money”)
Usually hold on because upside
is unlimited and downside is
small
Scenario 3:
Strike Price = $1
(“way in the money”)
Exercise and either sell in a year
or sell right away

19. Timing of Sale
19
Sell everything as soon as you can!
Sell when you anticipate price decline…
Our initial recommendation:
Or…
If you expect price increase…
• Do not exercise options - the tax savings are not that significant.
• A better strategy is to use that cash to buy more stock.
Or…
It is safest to wait to exercise until you are ready to sell
• If stock increases, you profit.
• If not, there is no cash lost.

20. Priority List
20
Priority Action Logic (typical, not always the case)
1 Sell RSUs • Highest basis, so no benefit to waiting.
2 Sell ESPP • Gain will normally be taxed as ordinary income
3
Exercise/Sell
NSOs
• Basis is market value when exercised; after ESPP due
to less downside
4
Exercise/Sell
ISOs
• Lowest basis, best potential for LT Gains; sell last
given AMT issues

21. Case Study: Jenny the Engineer
Client Info & Assumptions
Salary $150,000
ISOs 100,000
Strike Price $1.50
Price at Exercise Date $20
Healthcare payroll deduction $1,000
401(k) payroll deduction $4,000
Property taxes $100
Residency California
Filing Status Single
21

22. Case Study: Jenny the Engineer
Tax Situation
Federal Tax – Regular Method $29,699
AMT Method $25,930
Total Federal $29,699
State tax - regular $10,515
AMT method $5,501
Total State $10,515
Total Taxes $40,214
Average Tax Rate 26.8%
Marginal Tax Rate 34.7%
Strategy I: Wait To Exercise Options Key Points
• Jenny is close to AMT on federal, but not on state
• Significant difference between average and
marginal tax rate
22

23. Case Study: Jenny the Engineer
Tax Situation
AMT ISO Income $1.85 Million
Regular Tax ISO Income $0
Federal Tax – Regular Method $141
AMT Method $556,575
Total Federal $556,575
State tax - regular $10,515
AMT method $139,542
Total State $139,542
Total Taxes $696,317
Average Tax Rate 34.8%
Marginal Tax Rate 35.0%
Strategy II: Exercise All Options and Hold Key Points
• Exercising triggers AMT
• Large state deduction reduces regular federal tax to
$141, but Jenny pays the higher AMT value
• Jenny needs to come up with exercise cost of
$150,000 + $656,103 of additional taxes = $806,103
• Average and marginal tax rates are closer
• AMT related tax payments “could” be used in
future years
• By exercising, Jenny gave up the time value of the
option
23

24. Case Study: Jenny the Engineer
Tax Situation
Sale Price $30
Sale Proceeds $3,000,000
Short-Term Capital Gain $1,000,000
Additional Compensation
Income
$1,850,000
Federal Tax - Regular $1,076,768
AMT method $886,216
Total Federal $1,076,768
State tax - regular $374,400
AMT method $209,650
Total state $374,400
Total taxes due $1,451,168
Average Tax Rate 48.4%
Marginal Tax Rate 52.6%
Strategy III: Exercise All Options and Sell in Same Year
Key Points
• There are no special adjustments to AMT
• Regular tax method governs since the short-term
capital gain and additional compensation income
taxed at ordinary income rates
• Jenny needs to come up with exercise cost of
$150,000 + $1,410,954 of additional taxes =
1,560,954, but she willl have $3,000,000 from sale.
• Average and marginal tax rates are close to 50%
• Best months to exercise:
• Pre-IPO: December
• Post-IPO: January
24

25. Case Study: Jenny the Engineer
Tax Situation
Year 1 Year 2
AMT ISO Income $1.85 Million
Sale Price $30
Sale Proceeds $3,000,000
Long-Term Capital
Gain
$2,850,000
Federal Tax - Regular $141 $639,905
AMT method $556,775 $302,555
Total Federal $556,775 $302,555
State tax - regular $10,515 $374,400
AMT method $139,542 $245,373
Total state $139,542 $245,373
Total taxes due $696,317 $547,928
Average Tax Rate 34.8% 47.6%
Marginal Tax Rate 35.0% 37.1%
Strategy IV: Qualified Disposition
Key Points
• Popular method among tech professionals
• Sometimes requires substantial tax payments for
the potential tax savings
• In this example, it saves $247,137 in taxes initially
and possibly $219,284 in future years due to AMT
credits
• While those savings are significant, it works out to
be only 15-18% of the gain and requires substantial
capital and substantial risk
25

26. Case Study: Jenny the Engineer
Tax Situation
Options Exercised 500
Cash Outlay $750
Federal Tax – Regular Method $29,699
AMT Method $29,167
Total Federal $29,699
State tax - regular $10,515
AMT method $6,148
Total State $10,515
Total Taxes $40,214
Average Tax Rate 26.8%
Marginal Tax Rate 34.7%
Strategy V: Exercise Partial Number of Options
Key Points
• Exercise enough options so that Regular Tax = AMT
(or close enough)
• Starts the clock on “capital gains”tax treatment
• Not much in cash outlay, no extra taxes (or very little)
26

27. Summary: ISOs
1
Many employees overestimate the tax savings from converting ordinary income
into capital gains.
2 The option has value that is lost when it is exercised early.
3
There is an opportunity cost to pay for the shares and pay for the taxes on
the shares.
4 We typically recommend waiting as long as possible to exercise.
5
If you are going to exercise early, we recommend staggering the exercise dates
over years, modeling out AMT tax exposure, and exercising during December
(Pre-IPO) and January (Post-IPO)
27

28. The Exited: Increasing Tax Efficiency
28
7 Strategies to Maximize Tax Efficiency
2. Maximize contributions to Tax-Deferred Accounts
3. Shift Income to Lowered Tax Parties
4. Maximize Asset Location Efficiency
5. Invest in Tax Efficient Vehicles
6. Donate Appreciated Investments
7. Harvest Tax Losses
1. Develop Focused Asset Allocations

29. Contact Information
Martin Curiel, CFA
martin@myecfo.com
(650) 231-4609

30. Disclosures
Nothing in this presentation should be construed as a solicitation or offer or
recommendation to buy or sell any security. Advisory services are only provided to
investors who become MYeCFO clients pursuant a written agreement, which clients are
urged to read carefully in determining whether such agreement is suitable for the
individual facts and circumstances. Past performance is no guarantee of future results,
and any hypothetical returns, expected returns, or probability projections may not
reflect actual future performance. Investors should review MYeCFO’s website for
additional information about advisory services.