By: Achaessa James, CEP/PMC

I’ve been doing plan administration since 1999 and have worked with many executive assistants and office managers of private companies that get plan administration tossed in their laps—on top of everything else they do! Most of the time, EAs and OMs don’t even know what questions to ask when this job gets added to their duties. Stock plan administration is complex and requires an understanding of tax, accounting, and securities laws to ensure that the plan is handled in compliance with ever-changing statutes and regulations. Mishandling a stock plan can mean trouble down the road.

A company would never think of having the executive assistant or office manager calculate payroll or insurance benefits and eligibility without professional resources and training. Stock plan administration is just as highly regulated and the consequences of non-compliance with statutes and regulations can be costly in more than just money—SEC cheap stock charges and delayed IPOs, the IRS disqualifying an entire tax-qualified plan, penalties and interest charged to employees, VC investors who back out of investment rounds, unhappy auditors, and more.

I know this task is daunting if you’re new to plan administration, but you’ll figure it out. At least that’s what the Board of Directors and the Executive Officers think. And they’re right – you will figure it out. You’re smart. You’re capable. As an administrative professional, you know (or at least can learn) how to do everything – it’s your Super Power!

Here are the first three basic questions you need to ask when you’re issuing new stock options under a Plan:

1. What type of stock option is it? There are two types of stock options: Incentive Stock Options (ISOs) and Non-qualified Stock Options (NSOs or NQSOs). NSOs can be given to anyone. ISOs are tax-qualified options governed by the Internal Revenue Code (IRC) and can only be given to people who are employees on the grant date of the award. Outside directors and consultants are not employees and cannot receive ISOs.
2. Are ISO recipients employees on the grant date? When you get the list of grants to put into your administration software or Excel spreadsheet (Excel! Eek! We’ll look at that in a later blog), check to see who got ISOs and cross-check their hire dates with the Grant Date of the award. The Grant Date is usually the date of board approval, but sometimes the board resolution will say “the later of these minutes or the recipient’s hire date” or similar language. That phrase is specifically so that ISOs don’t accidentally get granted to a non-employee. Oh, and acceptance of an offer of employment doesn’t count.
3. What’s the exercise price compared to the company’s common stock current fair market value (FMV)? The exercise price of the option must be 100% of the FMV on the Grant Date of the award. If it’s not, the consequences can be disqualification of an ISO, and an NSO can be in violation of the IRC deferred compensation statute, which would trigger penalties and interest to the award recipient.

To make matters worse, if a company has a pattern of violating even one of these three items, it can disqualify the entire plan. That means none of the award recipients under the plan would receive the tax benefits. Stock options are supposed to keep employees happy and motivated to work, not put them in financial jeopardy! As the do-it-all admin, it’s up to you to protect your company and its employees from the evil consequences of inadequate stock option administration!

Achaessa James has worked in equity compensation since 1999 in the legal, venture capital, and equity administration outsourcing fields. She is a senior Equity Compensation Consultant with Stock & Option Solutions where she supports clients with system implementations, data migrations, corporate governance audits, corporate transaction preparation, and special project design and implementation.   She is also the consulting Equity Compensation Product Manager for the National Center for Employee Ownership where manages the highly regarded twice-yearly CEP Exam Prep Course, and serves as the NCEO’s subject matter expert on equity compensation.

Achaessa’s focus on privately held companies has earned her a deep expertise in pre-IPO and M&A equity planning and audits, and best practices in administration and technology. She speaks on these topics at industry conferences and in webcasts, and is a published author with books including “If I’d Only Known That!”, and “The Private Company Equity Compensation Administration Toolkit” as well as many newsletter articles in industry publications. You can connect with Achaessa on LinkedIn.