Certified Equity Professional Institute

Transcription

1 Exam Overview Webinars Certified Equity Professional Institute L2 Exam Overview Webinar Equity Plan Design, Analysis, and Administration Certified Equity Professional Institute The information presented herein is of a general nature and has been simplified for presentation to a large audience. It is not a complete discussion of all aspects the laws, rules, regulations, standards, and principles that govern equity compensation plans. The contents are neither designed nor intended to be relied upon, and should not be considered, as legal, tax or accounting advice. Your specific situation may involve circumstances that cause the laws, rules, regulations, standards and principles described herein to apply differently. You should consult your own advisors before deciding what, if any, course of action to take in your own particular situation.

2 Overview 26% of the Level Two Exam is Equity Plan Design, Analysis, and Administration Read, outline, and understand the plan documents XYZ Equity Incentive Plan Employee Stock Purchase Plan Verify all questions relating to plan documents Review plan and all exhibits (option agreement, notice of exercise, etc.) Capitalized terms are defined in the plan, see the definitions provision -2-

3 Restricted Stock Stock awarded at no cost to employee (normally) Restricted stock award (RSA): Stock issued at grant and released to employee upon vesting. Generally eligible for voting and dividends while restricted. Watch for data privacy issues when sending information to transfer agent to issue shares. Book entry accounts usually require SSN to be transmitted Only send encrypted files via secure internet source Assign secondary unique identifier for future communications. Restricted stock unit (RSU): Stock issued to employee upon vesting. Cannot be voted until issued, is not eligible for dividends. May be eligible for dividend equivalents -3-

4 Restricted Stock Characteristics Usually awarded at no cost (or at par value) Par Value: In some locations, minimum payment the company is legally required to collect before issuing its stock Past services or using treasury shares Shares are earned subject to vesting requirements Shares are non-transferable until vested Subject to forfeiture if employee terminates prior to vesting Previously issued stock is repurchased at cost by the company Vesting may be based on performance criteria Repurchase at termination If employee paid for the stock, repurchase at lower of employee s original cost or current fair market value (subject to plan rules) If privately held company may have restrictions on disposal of shares. Plan may include a right of first refusal, which entitles company to repurchase shares -4-

5 Exercise Methods - Options Swap exercise Use of previously acquired stock to pay for option exercise Example: Participant holds an option grant for 1,000 shares priced at $10 per share; current FMV for the company is $25 per share. Total cost of the option is $10,000 ($10 x 1,000) Participant delivers 400 previously purchased shares ($10,000 / $25) 1,000 shares issued to the participant -5-

6 Stock Swaps Change in Cost Basis Example Employee owns: 125 shares of stock purchased on the open market when the FMV was $10 Vested NSO for 200 shares with an exercise price of $5/share FMV today is $20 Employee uses a stock swap to exercise option Total cost to exercise is $1,000 Instead of paying cash for the exercise, the employee uses 50 shares of the stock purchased in the open market 50 shares X $20 = $1,000 Employee now has a total of 275 shares 150 new shares with a basis $20/share 50 replacement shares with a basis $10/share these were swapped for the exercise price 75 old shares with a basis $10/share remaining from the shares purchased on the open market -6-

7 Exercise Methods - Options Trading Shares for Taxes Use of currently exercised stock to cover required tax withholding Trade only stock currently being exercised, exchanging previously acquired stock creates an additional tax obligation Special Considerations Generally only allowed on non-qualified stock options -7-

8 Stock Appreciation Rights Characteristics Right to receive appreciation in value of share of stock from date of grant until date of exercise Difference between option price and current value Vesting schedule attached Employee times exercise and income recognition No cash outlay required from participant Payable in cash, shares of stock or a combination of both Can be granted in tandem with stock options Employee is able to exercise either the stock option or the SAR, but not both An employee exercises an SAR for 1,000 shares with a price of $10 per share when the market value is $25 per share. If paid in cash, the employee will receive a payment of $15,000. If paid in stock, the employee will receive 600 shares ($15,000 / $25). -8-

9 NSO vs. SAR Example Option Employee is entitled to shares and/or gain $15 $25 SAR Employee is only entitled to gain, not underlying shares $15 $25 $10 $10 Grant Vest Exercise Grant Vest 1,000 share 1,000 share Exercise -9-

10 Plan Provisions Change-in-control provisions Delineate what happens to awards in a merger or purchase of company Plan should clearly define what constitutes a change in control Early-exercise provisions Allow exercise of unvested options Subject to right of repurchase upon termination Repurchase amount equals exercise price Shares held in escrow until vested Performance Measures -10-

11 Evergreen Provisions Automatic increase in authorized shares at specific times, based on a rule or formula Every Jan. 3, increase by 100,000 shares Every Jan. 3, increase by 10% of the amount of shares outstanding at yearend Every Jan. 3, increase by the lesser of 100,000 shares or 10% of the amount of shares outstanding at year-end What steps need to be taken if your plan has such a provision? Calculation Amend Form S-8 Update tracking software and reconciliation reports Notify transfer agent, broker, outsource provider Create timeline of dates and impact -11-

12 Plan Procedures Internal Controls SOX 404 reporting Review third-party providers for adequate oversight IT controls for equity compensation tracking system Segregation of duties between award approval and entry Documentation of plan-related approvals Procedures for communication Documentation of assumptions used to calculate accounting expense SEC reporting -12-

13 Performance Plans Performance Award A stock-settled performance stock unit, performance stock award, or performance stock option. Performance Stock Unit (PSU) RSU A promise to award shares for no cost in the future contingent on achieving associated performance goals and meeting the requisite service period. Performance Stock Award (PSA) RSA Shares awarded at grant for no cost contingent upon achieving goals. When the performance goals and service period are met, shares are released to the employee. Performance Stock Option (PSO) Option A stock option granted with vesting or price contingent on achieving associated performance goals and service requirements. -13-

14 Grant Procedures Internal Controls Verify adequate shares available in share pool Review award terms, recipient eligibility, and employee demographic data for accuracy Verify appropriate grant approvals have occurred and verify grant date Verify grants agree with source documents Advise transfer agent of award Notify grant recipients and collect acceptances Review whether appropriate disclosures sent to grant recipients -14-

15 International Considerations Cultural and language differences Labor laws Data privacy Currency exchange controls Implementation issues -15-

16 Educational Courses to Assist In Exam Preparation NASPP NCEO Although the CEP Institute makes this information available to candidates, we do not endorse educational programs. The candidate must determine whether the program is suitable for his/her needs. -16-