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Primary	
  
Compensa.on	
  
Use
Typical	
  
Plan	
  
Sponsor
Typical	
  
Recipient
Main	
  Features
Key	
  
Accoun.ng
Issues
Key	
  
Legal
Issues
Key	
  
Tax
Issues
Key	
  
Communica.on	
  
Issues
Key	
  
Administra.on	
  
Issues
Incen.ve	
  Stock	
  Op.ons
(ISO)
Attract and Motivate.
Retention when stock
price is growing
steadily
Pre-IPO and Publicly
traded companies
(high-tech/biotech
and high growth
sectors)
Execs at all sizes
High-tech staff at Small
to Mid-size companies
Preferential tax treatment.
Limits on use.Highly
Leveraged. Pays only if price
increases
Complex valuation and
amortization. Difficult market
comparisons. Adjustments can
be expensive
Limits on Grant Price, Value
of Grant, Term of Grant and
Term of Plan. Shareholder
approval required within 12
months of BOD adoption
No tax withholding at exercise. No
Ordinary income if held for qualifying
period. Not applicable to int'l
participants. Alternative MinimumTax
concerns
Difficult to show value if
underwater. Leverage can
be an issue in highly
volatile stocks. Tax issues,
Dispositions, AMT
Activity peaks and valleys.
Grant processing.Exercise
processing. Termination
rules. Int'l issues.
Disposition tracking
Non-­‐Qualified	
  Stock	
  Op.ons
(NQSO)
Attract and Motivate.
Retention when stock
price is growing
steadily
Pre-IPO and Publicly
traded companies
(all sectors)
Widely used,grant size
generally based on
position.Consultants
and Outside BOD
members
Highly Leveraged.
Guaranteed corporate tax
deduction when exercised.
Pays only if stock price
increases
Complex valuation and
amortization.Difficult market
comparisons. Variable FairValue
accounting for non-employee
service providers
General plan documentation.
Detailed documentation
when used for outside BOD
members.Post-termination
rules and regulations
Ordinary Income andTax withholding at
Exercise.409A SupplementalWages
eligible ($1M threshold)
Difficult to show value if
underwater.Leverage can
be an issue in highly
volatile stocks. Tax issues
at exercise.
Activity peaks and valleys.
Grant processing.Exercise
processing.Termination
rules.Int'l issues.Tax at
Exercise
Restricted	
  Stock	
  Shares	
  
(RSS)
Attract and Retain.
Motivation added
when awarded at
higher than $0 cost to
participant
Closely Held and
Publicly traded
companies (less
volatile sectors)
Upper and Middle
Management
Value if price drops.
Minimally leveraged.Can be
used to satisfy Executive
Ownership requirements.
Does not fall under IRC
409A
SimpleValuation. Value is Intrinsic
value on award date.Cost
essentially equivalent to paying
cash.Retirement eligibility can
result in accounting for expense
prior to vesting completion
Private companies are
subject to Blue Sky laws.
Public companies are subject
to SEC regulations at the
time of award
No income or tax until vested. 83(b)
election to be taxed at award date.Sell-
to-Cover requires sufficient trade
volume. Withhold-to-cover requires
sufficient corporate cash. Retirement
eligibility can result in income and tax
prior to retirement
Event-based,forced
income and taxation.
Comparison to Options
Award processing.
Coordination of timing with
other corporate issues.
Repurchases.83(b)
elections.Dividend tracking.
Share issuance at time of
award
Restricted	
  Stock	
  Units	
  
(RSU)
Attract and Retain.
Motivation added
when awarded at
higher than $0 cost to
participant
Large Pre-IPO,
Closely Held and
Publicly traded
companies (mature
tech,less volatile
sectors)
Widely used above
operational staff and
for late-stage
employees at pre-IPO
companies
Value if price drops.
Minimally leveraged.Better
internationally than RSS.Less
dilutive than Options
SimpleValuation. Value is Intrinsic
value on award date. Cost
essentially equivalent to paying
cash
409A considerations.
Registration of shares prior
to award
No income or tax until vested.Dividend
Equivalents taxable unless fully restricted.
Sell-to-Cover requires sufficient trade
volume. Withhold-to-cover requires
sufficient corporate cash.Deferral
potential with sufficient notification
Time or Event-based,
forced income and
taxation.Comparison to
Options
Award processing.Event
Planning with other
corporate issues.
Forfeitures.Dividend
Equivalent tracking.Share
movement at time of vest
Performance	
  Awards
(PSU)
Motivate
Publicly traded
companies
(especially if subject
to Say on Pay voting)
Executives,Scientists,
Finance staff
Preferred by shareholders,
especially for Say on Pay
considerations.Payout
earned,modified or
accelerated if goals are met.
Complex design issues
Very complex accounting and
valuation. Value of market-based
goals cannot be reversed if
missed.Non-market-based goals
require probability calculations
Possible challenges from
shareholders and recipients
regarding meeting and
issuing of performance goals
Income and taxes due at vesting. Due to
unpredictable nature of performance it
can be difficult to plan for the tax event.
Deferral potential with sufficient
notification
Understanding and
management of
performance-criteria.
Event-based income and
taxation
Monitoring goals against
awards.Processing with
limited pre-notification.
Standard RSU issues
Stock	
  Apprecia.on	
  Rights	
  
(SAR)
Attract and Motivate
Privately held
companies
Upper and Middle
Management
Can be settled in cash or
stock.Provides option-like
features
Stock-settled treated like options
(fixed,FairValue accounting).
Cash-settled require variable
accounting (quarterly adjustment
of FairValue)
Possible ERISA issues with
long-term holding period on
broad-based plans.Generally
not deemed "stock" for S
Corps
Taxed at time of exercise. Ordinary
Income andTaxes must be withheld
Comparison to options
(stock value no/no stock).
Delivery of only the
appreciation rather than
whole grant
Limited support from
brokers at exercise (unlike
options).Limited overall
software capabilities
IRC	
  423	
  Employee	
  Stock	
  
Purchase	
  Plan	
  
(ESPP)
Retain,Motivate and
create ownership
Publicly traded
companies and
those in the process
of IPO
Broad-based (required
by law)
Preferential tax treatment.
Very flexible.Requires "skin
in the game" from
participants.Excellent
communication tool
Features drive valuation.
Discount of 5% or less,and no
look-back = no expense.Option-
like element (look back) or
discount of greater than 5%
requires option valuation and
expense underASC 718
Limits on participant
inclusion/exclusion. Limits
on Discount,Term of
Offering, Value of share
purchased in each calendar
year. Shareholder approval is
required within 12 months
of BOD adoption
No Ordinary Income or Capital Gain/loss
until first transfer.Grant Date Discount is
minimum amount of Ordinary Income.
Must hold shares for 2 yrs from grant and
1 yr from purchase to receive preferential
treatment
Comparison to 401K.
Enrollment and
contributions.
Dispositions and tax
consequences.Great tool
to support
communication from
executives
Coordinating HR and
Payroll systems and staff.
Quick turn-around at
purchase date.Surveys until
all shares are transferred,
even for ex-employees
Non-­‐Qualified	
  Stock	
  
Purchase	
  Plan
(NQ-­‐ESPP)
Retain and create
ownership
Mature publicly
traded companies
(non tech sector)
Management-only or
broad-based
Ease of purchase and admin.
Low cost.Limited
shareholder impact
Expense only if purchase is made
at a discount
Possible 409A issues if
shares are restricted after
purchase
Ordinary Income and tax withholding at
Purchase for any discount amount
Comparison to purchases
on open market.
Understanding company
role
Coordinating HR and
Payroll systems and staff.
Quick turn-around at
purchase date.If
discounted,taxation at
purchase
Deferred	
  Stock	
  Units
(DSU)
Retain and create
ownership.
Retirement
Mature publicly
traded companies
(non tech sector)
Executives (C-Suite)
Income andTax deferral.
Flattens volatile pay cycles.
Creates retirement income
SimpleValuation. Value is Intrinsic
value on award date.Cost
essentially equivalent to paying
cash
Deferral Election must be
made within strictly defined
period.Payout restrictions
must be clearly defined to
meet tax rules.162(m)
considerations
EmploymentTax (FICA/FUTA) due at
orig.vest date. Ordinary Income and tax
withholding at end of deferral period.
Complex 409A issues
Complex tax issues.
Complex release timing
rules.Dividend income
Separating Employment
Income from Ordinary
Income.Limited software
support. Long-term
tracking issues
Phantom	
  Stock	
  Awards
(PSA)
Attract and Retain
(may replace stock
settled RSS an RSU)
Privately held and
mature publicly
traded companies
Upper and Middle
Management
Can be settled in cash or
stock.Provides restricted
stock unit-like features
If award can be settled in cash,
then variable accounting is
required (quarterly adjustment
of IntrinsicValue)
Possible ERISA issues with
long-term holding periods
on broad-based plans.
Generally not deemed
"stock" for S Corps
No income or tax until vested. Taxes
generally withheld from final cash
payment
Comparison to RSS/RSU
(stock value but no stock).
Delivery of full value but
generally in cash
Limited software support.
Coordination with Payroll
and treasury at payout.
Standard RSU issues
The Equity Compensation Design and Use Matrix
Toll	
  free	
  877-­‐803-­‐9255	
  |	
  Direct	
  415-­‐625-­‐3406
email:	
  info@performensa?on.com
web:	
  www.performensa?on.com
Equity	
  Types
Issues	
  and	
  Features
©2016	
  Performensa?on

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Equity Compensation Design and Use Matrix

  • 1. Primary   Compensa.on   Use Typical   Plan   Sponsor Typical   Recipient Main  Features Key   Accoun.ng Issues Key   Legal Issues Key   Tax Issues Key   Communica.on   Issues Key   Administra.on   Issues Incen.ve  Stock  Op.ons (ISO) Attract and Motivate. Retention when stock price is growing steadily Pre-IPO and Publicly traded companies (high-tech/biotech and high growth sectors) Execs at all sizes High-tech staff at Small to Mid-size companies Preferential tax treatment. Limits on use.Highly Leveraged. Pays only if price increases Complex valuation and amortization. Difficult market comparisons. Adjustments can be expensive Limits on Grant Price, Value of Grant, Term of Grant and Term of Plan. Shareholder approval required within 12 months of BOD adoption No tax withholding at exercise. No Ordinary income if held for qualifying period. Not applicable to int'l participants. Alternative MinimumTax concerns Difficult to show value if underwater. Leverage can be an issue in highly volatile stocks. Tax issues, Dispositions, AMT Activity peaks and valleys. Grant processing.Exercise processing. Termination rules. Int'l issues. Disposition tracking Non-­‐Qualified  Stock  Op.ons (NQSO) Attract and Motivate. Retention when stock price is growing steadily Pre-IPO and Publicly traded companies (all sectors) Widely used,grant size generally based on position.Consultants and Outside BOD members Highly Leveraged. Guaranteed corporate tax deduction when exercised. Pays only if stock price increases Complex valuation and amortization.Difficult market comparisons. Variable FairValue accounting for non-employee service providers General plan documentation. Detailed documentation when used for outside BOD members.Post-termination rules and regulations Ordinary Income andTax withholding at Exercise.409A SupplementalWages eligible ($1M threshold) Difficult to show value if underwater.Leverage can be an issue in highly volatile stocks. Tax issues at exercise. Activity peaks and valleys. Grant processing.Exercise processing.Termination rules.Int'l issues.Tax at Exercise Restricted  Stock  Shares   (RSS) Attract and Retain. Motivation added when awarded at higher than $0 cost to participant Closely Held and Publicly traded companies (less volatile sectors) Upper and Middle Management Value if price drops. Minimally leveraged.Can be used to satisfy Executive Ownership requirements. Does not fall under IRC 409A SimpleValuation. Value is Intrinsic value on award date.Cost essentially equivalent to paying cash.Retirement eligibility can result in accounting for expense prior to vesting completion Private companies are subject to Blue Sky laws. Public companies are subject to SEC regulations at the time of award No income or tax until vested. 83(b) election to be taxed at award date.Sell- to-Cover requires sufficient trade volume. Withhold-to-cover requires sufficient corporate cash. Retirement eligibility can result in income and tax prior to retirement Event-based,forced income and taxation. Comparison to Options Award processing. Coordination of timing with other corporate issues. Repurchases.83(b) elections.Dividend tracking. Share issuance at time of award Restricted  Stock  Units   (RSU) Attract and Retain. Motivation added when awarded at higher than $0 cost to participant Large Pre-IPO, Closely Held and Publicly traded companies (mature tech,less volatile sectors) Widely used above operational staff and for late-stage employees at pre-IPO companies Value if price drops. Minimally leveraged.Better internationally than RSS.Less dilutive than Options SimpleValuation. Value is Intrinsic value on award date. Cost essentially equivalent to paying cash 409A considerations. Registration of shares prior to award No income or tax until vested.Dividend Equivalents taxable unless fully restricted. Sell-to-Cover requires sufficient trade volume. Withhold-to-cover requires sufficient corporate cash.Deferral potential with sufficient notification Time or Event-based, forced income and taxation.Comparison to Options Award processing.Event Planning with other corporate issues. Forfeitures.Dividend Equivalent tracking.Share movement at time of vest Performance  Awards (PSU) Motivate Publicly traded companies (especially if subject to Say on Pay voting) Executives,Scientists, Finance staff Preferred by shareholders, especially for Say on Pay considerations.Payout earned,modified or accelerated if goals are met. Complex design issues Very complex accounting and valuation. Value of market-based goals cannot be reversed if missed.Non-market-based goals require probability calculations Possible challenges from shareholders and recipients regarding meeting and issuing of performance goals Income and taxes due at vesting. Due to unpredictable nature of performance it can be difficult to plan for the tax event. Deferral potential with sufficient notification Understanding and management of performance-criteria. Event-based income and taxation Monitoring goals against awards.Processing with limited pre-notification. Standard RSU issues Stock  Apprecia.on  Rights   (SAR) Attract and Motivate Privately held companies Upper and Middle Management Can be settled in cash or stock.Provides option-like features Stock-settled treated like options (fixed,FairValue accounting). Cash-settled require variable accounting (quarterly adjustment of FairValue) Possible ERISA issues with long-term holding period on broad-based plans.Generally not deemed "stock" for S Corps Taxed at time of exercise. Ordinary Income andTaxes must be withheld Comparison to options (stock value no/no stock). Delivery of only the appreciation rather than whole grant Limited support from brokers at exercise (unlike options).Limited overall software capabilities IRC  423  Employee  Stock   Purchase  Plan   (ESPP) Retain,Motivate and create ownership Publicly traded companies and those in the process of IPO Broad-based (required by law) Preferential tax treatment. Very flexible.Requires "skin in the game" from participants.Excellent communication tool Features drive valuation. Discount of 5% or less,and no look-back = no expense.Option- like element (look back) or discount of greater than 5% requires option valuation and expense underASC 718 Limits on participant inclusion/exclusion. Limits on Discount,Term of Offering, Value of share purchased in each calendar year. Shareholder approval is required within 12 months of BOD adoption No Ordinary Income or Capital Gain/loss until first transfer.Grant Date Discount is minimum amount of Ordinary Income. Must hold shares for 2 yrs from grant and 1 yr from purchase to receive preferential treatment Comparison to 401K. Enrollment and contributions. Dispositions and tax consequences.Great tool to support communication from executives Coordinating HR and Payroll systems and staff. Quick turn-around at purchase date.Surveys until all shares are transferred, even for ex-employees Non-­‐Qualified  Stock   Purchase  Plan (NQ-­‐ESPP) Retain and create ownership Mature publicly traded companies (non tech sector) Management-only or broad-based Ease of purchase and admin. Low cost.Limited shareholder impact Expense only if purchase is made at a discount Possible 409A issues if shares are restricted after purchase Ordinary Income and tax withholding at Purchase for any discount amount Comparison to purchases on open market. Understanding company role Coordinating HR and Payroll systems and staff. Quick turn-around at purchase date.If discounted,taxation at purchase Deferred  Stock  Units (DSU) Retain and create ownership. Retirement Mature publicly traded companies (non tech sector) Executives (C-Suite) Income andTax deferral. Flattens volatile pay cycles. Creates retirement income SimpleValuation. Value is Intrinsic value on award date.Cost essentially equivalent to paying cash Deferral Election must be made within strictly defined period.Payout restrictions must be clearly defined to meet tax rules.162(m) considerations EmploymentTax (FICA/FUTA) due at orig.vest date. Ordinary Income and tax withholding at end of deferral period. Complex 409A issues Complex tax issues. Complex release timing rules.Dividend income Separating Employment Income from Ordinary Income.Limited software support. Long-term tracking issues Phantom  Stock  Awards (PSA) Attract and Retain (may replace stock settled RSS an RSU) Privately held and mature publicly traded companies Upper and Middle Management Can be settled in cash or stock.Provides restricted stock unit-like features If award can be settled in cash, then variable accounting is required (quarterly adjustment of IntrinsicValue) Possible ERISA issues with long-term holding periods on broad-based plans. Generally not deemed "stock" for S Corps No income or tax until vested. Taxes generally withheld from final cash payment Comparison to RSS/RSU (stock value but no stock). Delivery of full value but generally in cash Limited software support. Coordination with Payroll and treasury at payout. Standard RSU issues The Equity Compensation Design and Use Matrix Toll  free  877-­‐803-­‐9255  |  Direct  415-­‐625-­‐3406 email:  info@performensa?on.com web:  www.performensa?on.com Equity  Types Issues  and  Features ©2016  Performensa?on