From our colleagues William H. Hoffman and Cisco Palao-Ricketts

Due to high competition to attract employee talent and to improve employee recruiting and morale, several private companies in the technology sector have recently altered typical stock option terms to extend the exercise period of vested stock options following termination of employment.

This new trend carries with it a complex set of considerations for employers that we examine in more detail here.
Continue Reading Equity Compensation Trend: Extending Time to Exercise Vested Stock Options

Employers, from startups to public companies, need to be aware of the following requirements and take action by January 31st if they apply.  Section 6039 of the Internal Revenue Code requires a corporation to furnish a written statement to any employee or former employee who either (i) exercised an incentive stock option within the meaning of Section 422 of the Code (ISO) during 2013 or (ii) during 2013 first transferred legal title to shares acquired under the corporation’s employee stock purchase plan within the meaning of Section 423 of the
Continue Reading Employers: 2014 Deadlines to Furnish ISO and ESPP Information Statements and Returns

As a general rule, all stock option grants need to have an exercise price at or above the fair market value of the company’s common stock on the date such grant is made. This requirement, and its many related complexities, generally comes from Section 409A of the Internal Revenue Code and the related Internal Revenue Service (“IRS”) regulations (collectively, “Section 409A”). Section 409A was enacted several years ago in response to perceived abuse of deferred compensation arrangements brought to light during various high-profile corporate scandals.

The two main penalties imposed by Section 409A for granting a stock option with an exercise price below fair market value are (i) immediate tax upon vesting of the option (as opposed to at exercise or sale) and (ii) an additional 20% federal tax penalty (on top of the regularly applicable federal and state taxes). In addition, some states, such as California, may impose their own Section-409A-equivalent penalty tax. In order to avoid these penalties, the IRS requires that a stock option must be granted with an exercise price no less than the underlying shares’ fair market value determined as of the grant date and that such fair market value must be “determined by the reasonable application of a reasonable valuation method.”

The good news is that Section 409A provides three “safe-harbor” methods for determining fair market value, two of which are most commonly relied upon by startups and venture-backed companies (discussed below). If one of these safe harbor methods is used, then the resulting fair market value is presumed to be “reasonable” unless the IRS can establish that the company’s determination was “grossly unreasonable.”

Continue Reading Establishing fair market value for purposes of Section 409A and stock option grants

Courtesy of our colleagues Dean Fealk, Jordan Watson, Luigi Falivene and Graham Roe

Extending US Employee Stock Plans to UK Employees: What you Need to Know“, published by our Global Equity Compensation group, covers some of the key issues to consider when planning to issue options to UK employees from a US equity plan.
Continue Reading UK Employees Participating in US Employee Stock Plans

Megan Muir

NY venture capitalist Fred Wilson has an interesting blog post about various approaches to employee equity being considered by some of his fund’s portfolio companies. For now, he comes out in favor of granting stock options instead of restricted stock or other forms of equity. The last few lines reveal some of his investing approach:

Continue Reading Employee Equity Comp – A VC Says be Generous