Admin Super Powers-Part 9: The Real Scoop

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Whether your company is ready to roll out a new equity compensation plan or already has a legacy plan in place, the employees and others receiving the awards are likely to have lots of questions, like:

  • What is a stock option, restricted stock unit, stock appreciation right?
  • What is this piece of paper really worth?
  • What is vesting?
  • What happens to my award if I leave the company?
  • How do I exercise my award?
  • Is there anything important that I need to know about this award?

We’ve already give you information on vesting, termination and exercise, so let’s take a high-level look at the other three questions.

Describing the award and its value. There are two basic award types – appreciation awards and full-value awards.

Full value awards give you the full value of the stock underlying the award – like a restricted stock unit (RSU) or a restricted stock award (RSA) granted with no exercise price.

  • On the grant date of the award, the value to the recipient is equal to the price of the company’s common stock and as the price of the common stock goes up or down, the value of the award increases or decreases.
  • RSA stock is usually issued at grant and released at vesting. Because RSAs are issued at grant the holder is a real shareholder and will likely have voting rights and receive dividends, even before the award vests.
  • RSU stock is not issued until the vesting release date. Thus, RSUs won’t have voting rights until the stock is issued, but the holder might be eligible to receive payments that are equivalent to dividends, depending upon your company’s policy.

Appreciation awards, like stock options and stock appreciation rights, have an exercise price associated with them.

  • The value of the award on any given date will be the difference between the exercise price and the current stock price.
  • The stock for the award isn’t issued until the holder pays the exercise price when the award is vested, so there are no voting rights or dividend rights until then.

Important points to cover. The company should never give tax or legal advice to its employees, but equity compensation awards will have tax consequences to the award recipients, and securities law will govern when they can sell their shares. Best practice is to provide generic information to employees and then refer them to their own tax professionals:

  • Generally, when a full-value award vests or a vested appreciation award is exercised, it becomes subject to taxation on the difference between the purchase price, if any, and the vest or exercise date stock price.
  • If the award recipient is an employee, the company will have to report the income and withhold taxes.
  • In some cases awards can be exercised before vest. In this circumstance, Internal Revenue Code section 83 provides a mechanism by which the stockholder can have the award taxed at exercise instead of at vest. There are benefits and risks to this approach that the stockholder should discuss with a tax professional.
  • A tax-qualified Incentive Stock Option (ISO) is not subject to ordinary income taxes at exercise, but the exercise will require the tax preparer to do an Alternative Minimum Tax calculation to see if the stockholder owes AMT because of the exercise.
  • Because ISOs also have holding requirements (two years after date of grant AND one year after date of exercise), the stockholder must inform the company when the ISO-obtained stock is sold.

Short blogs are no place to give in-depth advice on such a complicated subject – especially when a company communication that’s not properly done can expose the company to unwanted liability or misunderstanding with their employees. There are professional consulting services like the one I work for that can support the company in creating a communication plan that best suits the company culture and, in the meantime, here are some excellent resources for you and your employees:

GPS: Participant Education and Communication. This is a publication researched and compiled by the Certified Equity Professional Institute. It can be downloaded for free, here. This website is a superior resource for both award recipients and issuing companies.

Consider Your Options. This book is a plain English discussion geared toward the award recipient that discusses in detail what an equity award is, the benefits and risks associated with awards, general tax issues, the value of the award to the award holder, and more.

Next month we’ll talk about how to prepare your company for a corporate transaction (acquisition, merger, IPO) in Admin Super Powers.

Thanks for reading my Admin Super Powers blog series on stock and option plan administration. I’m coming to IAAP Summit 2016 in Hollywood, Florida this July. It would be great to meet all of you! 

My company would like to know the equity plan administration needs and wants of conference participants. Please complete this 3-question survey to help me get a general idea. Your answers are very much appreciated. See you at the Learning Table sessions at IAAP Summit!


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 she 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.

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