Ringing in the New Year, in November!

In this season of giving thanks, everyone is thankful for their year-end checklists. Prepping for year-end doesn’t begin with the champagne corks popping on December 31. For those of you who haven’t started thinking about year-end yet, we are providing a few items below for which you should give thanks:

  • 1. Be thankful for payroll audits: If you aren’t on a quarterly or monthly audit schedule with payroll, start now. It will save you much needed time at year end.
  • 2. Be thankful for your 6039 providers: Even if you have a December 31 ESPP purchase, engage them now so that everything runs smoothly once you have your complete 2017 data set. If you don’t have a 6039 provider, get one now!
  • 3. Be thankful for 1099s: Start pulling together the information now for the 1099s your company needs to send in January.
  • 4. Be thankful your ESPP transfer restrictions. Be thankful your plan states that employees have to keep their ESPP shares at the captive broker. What? Your plan doesn’t have a transfer restriction? Then get those surveys out before the turkey thaws out. (And don’t forget, transfer restrictions may not apply to your executives. You may need to do some checking up on those shares!)
  • 5. Be thankful for collaboration: Make sure you are reaching out now to other departments to understand their year-end deadlines.

Have a wonderful holiday season and Xtra will see you in 2018!

We are thankful for Excel tips! Aren't you?

The Life of an ISO

In this installment of SOS’ Beginner’s Equity Series, we are discussing Incentive Stock Options. Section 422 Qualified Incentive Stock Options are sometimes referred to as an “ISO” or “qualified option.” These equity instruments are very popular with private companies. This article will step you through the overview of the life of an ISO.

Grant:  The eligible employee is granted an ISO, which is approved by the Board of Directors or any authorized sub-committee of the Board.  ISOs are generally only granted to US employees, due to the fact that their tax benefits do not apply in non-US countries.

If the ISO is granted to a Section 16 reporter at a publicly traded company[i], Legal will disclose the terms of the ISO on a public filing (Form 4) due two days after the date of grant.

There is a limit on the number of shares that can be granted as an ISO.  Only $100,000 worth of shares may vest each year under an ISO and the Fair Market Value on the date of grant (which is generally also the exercise price) is the measurement for the $100,000 limit.  For example, if a company grants Employee A an option for 100,000 shares that vest 25% each year when the Fair Market Value is $1 per share, the grant would be count as $25,000 each year for the next four years toward the employee’s $100,000 limit.  (25,000 shares vesting each year at $1 per share.)  It is important to note that the grants are cumulative.  When Employee A receives another grant during the next four years, any shares that vest will be added to the $25,000 that counts toward the $100,000 limit.

Vest:  At vest, there is no taxable event for the employee.  The taxable event generally occurs at sale.

Exercise:    No Federal or state taxes are due at exercise[ii] (except in Pennsylvania).  Accounting/Treasury reconciles the bank account to ensure the correct amount of money was received from employees for the option cost (shares exercised multiplied by the exercise price) and deposits the purchase funds into the company’s general account.  No payroll reporting is required unless taxes were withheld in Pennsylvania.

Employees may have any of the below listed choices regarding payment of the exercise price at exercise.

  • • Electing to have enough of the shares sold on the open market to cover the option cost. The broker then remits the funds to the company.  This election is usually available only to publicly traded companies.
  • • Electing to have all of the shares sold on the open market. The broker then remits the funds to cover the option cost to the company and gives the employee the remainder of the proceeds.  This election is usually available only to publicly traded companies.
  • • The company withholds shares in value equal to the amount of the option cost and deposits the remainder of the shares in the employee’s account. This is called either “withholding shares” or “net settlement”.

An employee may be allowed to “early exercise” (exercise the option prior to the shares vesting).  Check your plan and option agreement to see if it specifically indicates that early exercise is allowed.  If the plan and option agreement make no mention of allowing early exercise, then it is not permitted.

Legal will report the exercise of the ISO on a Form 4 filing within two business days of the exercise date, if the company is publicly traded.

Share tracking after exercise:  Since the taxable event for most US employees occurs at sale of shares acquired under an ISO, it is vital to track the sale of shares for US employees.  If shares are sold within the required holding period (two years of the grant date and one year after the exercise date), this is called a disqualifying disposition.  The amount of gain reported by the company on the employee’s W-2 is the lesser of:  (1) the difference between the exercise price and the fair market value on the date of exercise or (2) the difference between the exercise price and the sale price.

Once Sale information is received, Stock Administration uploads this information into the stock administration system and generates a report for Payroll.  Payroll includes the information on the employee’s Form W-2, but does not withhold taxes from the employee’s paycheck.

If the employee holds the shares and sells after the holding period requirements have been met, the entire gain or loss on the transaction is long term capital gain or loss.  There is no tax withholding obligation on the company’s part.[iii]  This is called a qualifying disposition.

Tax implications for the company:  When the company tracks disqualifying dispositions and reports them on the employee’s Form W-2, they are entitled to a corporate tax deduction in the amount of compensation they report on behalf of the employee.   The Tax Department will request reports from Stock Administration regarding the amount of disqualifying dispositions on a regular (monthly, quarterly or annually) basis to estimate the tax deduction for the year.

Stock Based Compensation Expense:  At grant, Finance will start calculating and disclosing expense (in the financials) until either the ISO is forfeited (due to employee termination) or the ISO is fully expensed.  The expense can be calculated a by different methods, but the most popular is the use of an option valuing model called the Black-Scholes model.  No matter what model is used, Accounting Standards Codification Topic 718, Stock Compensation states that the following factors should be taken into account when calculating the expense of an option:

  • • The option’s exercise price;
  • • The option’s expected term or life;
  • • The fair market value of the company’s stock;
  • • The volatility of the company’s stock;
  • • The dividend payment of the company’s stock; and
  • • The risk free interest rate.

Company’s US reporting obligations[iv]The company reports the income from a disqualifying disposition on the employee’s Form W-2 for the year of sale.   The Company does not have to report qualified dispositions on the employee’s Form W-2.

The company is also statutorily obligated to make additional reporting.  Under Internal Revenue Code Section 6039, the company must provide a statement to the employee regarding certain details of the exercise(s)[v].  The statement(s) must be mailed no later than January 31 of the calendar year following the year of the exercise(s).  Additionally, the company must also transmit electronically this information to the IRS by March 31 of the calendar year following the year of exercise(s).

Option Expiration:  An option is no longer outstanding if:

  • • It is fully vested and fully exercised;
  • • The life of the option passes and it expires without being exercised; or
  • • The option’s life is terminated due to the employee no longer providing service to the company.

We hope you have a better understanding of Incentive Stock Options.  Find a topic you’d like to see in this series?  Contact us at xtra@sos-team.com.

[i] Section 16 reporters:  Section 16 of the Securities and Exchange Act of 1934 regulates the trading of company securities by key corporate insiders.  These insiders will usually be the entire Board of Directors, the CEO, CFO, General Counsel and others deemed to have broad decision making power in the company.

[ii] For some employees, Alternative Minimum Tax (“AMT”) may be due in the year of exercise, unless the stock is sold in the same calendar year.  A full discussion of AMT is too complex to be addressed here, but to greatly simplify:  if the taxes regularly due on a Form 1040 under the applicable exemption amount are less than the taxes due as calculated on the amount subject to AMT (difference between the fair market value on the date of exercise minus the exercise price), the employee must pay the amount of taxes due under the AMT calculation.  This is highly technical tax information which is also highly personal depending on the employee’s financial status.  The company may want to warn the employee that AMT may apply, but not attempt to educate the employee in detail.  The company is best served by referring employees to their personal tax advisers prior to making any stock plan transactions.  As of October 2017, current tax reform under congressional consideration includes a proposal to abolish AMT.

[iii] A qualifying disposition is a sale that occurs after satisfying the holding period (two years from the grant date and one year after the exercise date).  No taxes are withheld by Payroll at sale - the employee reports sales and pays taxes on the Form 1040 for the year in which the sale occurred.

[iv] International reporting obligations vary from country to country.  This document only addresses IRS reporting obligations for US taxpayers.

[v] This form is called a Form 3921 and must include the name, address and employer identification number of the company issuing the shares, the name, address and social security number of the employee purchasing the shares, the grant date, the exercise date, the price paid per share, the number of shares exercised and fair market value of the company’s stock on the exercise date.

Upcoming Equity Compensation Webcast

Our webcasts cover high-priority equity compensation topics

SOS Educational Webcast: Hire Away: Top Hiring Tips for Your Equity Comp Dept.

Tuesday, December 12, 2017 11:00 AM PST


In this webcast, our experts will share their best practices for successfully hiring the right equity compensation professional for the job. Attendees will walk away with strategies for assessing team needs, ideas for evaluating interviewees, strategies for negotiating compensation, approaches for integrating new hires to create team synergies and more. Don’t miss this!


Andrea Best, Ph.D., Stock & Option Solutions, Inc.

Marianne Friebel, CEP, Dolby Laboratories

(One hour of Certified Equity Professional continuing education credit is available for attending. See the CEPI website for more information on CEP continuing education requirements.)

Meet your friends out on the slopes this ski season and let SOS step nimbly into your shoes while you're gone.

SOS Service Spotlight: 6039 Services & Solutions

The end of the year is busy enough. Let SOS take 6039 reporting off your plate.  From e-filing your 3921s & 3922s to mailing year-end participant statements, we do it all.

Why SOS?

Stock Plan Professionals – Once you have signed up with SOS, your 6039 project will be overseen and executed by SOS using processes developed and refined by SOS and utilizing technology developed by SOS. When you outsource to us, we outsource to no one.

Data Security and Integrity – The data necessary for 6039 reporting is extremely sensitive, and we treat it that way. Data transferred to SOS is heavily encrypted, and then handled entirely behind our firewall. We also thoroughly audit your files to catch most data issues before they end up on your participants’ statements, allowing you to avoid a costly and time-consuming correction process.

Experience – SOS was first-to-market with a complete 6039 solution, and has led the way ever since. We have serviced over 200 companies, mailed over 1 million participant statements, and have never missed an IRS deadline. Our clients trust our experience, and have been working with us since 2010 to meet this requirement.

SOS 6039 Services and Solutions:

● 3921/3922 statement creation

● Fulfillment/mailing

● E-filing

● Multi-year discounts available

● TIN Matching

Contact us today to learn more.


We've got an app for that!

SOS Front & Center: Tonya Epps, Director, Outsourcing Operations

Tonya began working in equity compensation in 2002 and currently works from our SOS Nashville office as our Operations Outsourcing Manager. She has worked closely with privately held and public companies, holds a BA in Finance with emphasis of Investments from Middle Tennessee State University and she received her CEP Designation in 2014. Tonya has also spoken at local and national industry events including the Annual NASPP Conference.

Here is what some of Tonya's clients are saying about her:

"Tonya is great. I would retain SOS just to get to work with her. Efficient, prompt, accurate and friendly." -Brad Serwin, Glassdoor

"Tonya is a great resource to have on the SOS team. She responds promptly to all inquiries and is extremely knowledgeable when it comes to equity administration and tax implications. If she is unaware of an answer, she will research the topic to get you an answer. We are really happy to have Tonya’s expertise and great customer services on our account!" -Sukhi Thethy, Aimmune Therapuetics

"I have been working with Tonya Epps since mid-2015. We engaged the consulting services of SOS shortly after our IPO. Tonya is extremely knowledgeable about her work and a great source of information whenever I have a question. She is also incredibly responsive and replies quickly, even if she doesn’t have an answer immediately. It is nice to have confirmation that your needs are being addressed. I had the pleasure of meeting her in person at a conference last year and she is just as pleasant in person as she is over the phone and email. I very much enjoy working with her." -Tammy Buckley, aTyr Pharma

"Tonya has been absolutely great to work with! Over the last 12 months, she has shepherded my team through various critical issues including onboarding a new HR team to our plan process, retiring a previous plan and implementing a new plan. She has also been instrumental in the administration of our plan as we moved to the OTC market. If she doesn’t know the answer, she will reach out to find it within her network. She is always willing to help and does so with a great attitude and the highest level of customer service. As someone new to administering stock plans, Tonya was invaluable to me as I transitioned into my new role within Amplify last year. Tonya is a business partner in the truest sense of the word and I feel very fortunate that she is part of my team." -Kim Evans, Amplify Energy Corp.

Across Our Desk

Tax Reform Troubles for Equity Comp…Baker McKenzie covers significant impact of bill on equity compensation…at the myStockOptions.com blog, Opportunities and Surprises…A nice overview of the the law’s potential impact at the NASPP Blog…and an obituary for equity compensation from Dan Walter.  We encourage you to get involved and be heard on this very important topic.

On the other side of the pond, stock options get a potential boost in Ireland

(non) Forfeiture of unvested equity compensation covered in recent court case.

More interesting research coming out of Fidelity: Employees less likely to raid retirement savings if they buy stock in an ESPP.

Executive comp corner…Equity plan share reserves: How to increase its life expectancy…Michael Melbinger covers ISS Changes for 2018.

Finally, some scenes from NASPP, courtesy of the NASPP Blog.  Congrats on another great conference this year.

SOS Xposé

...tender tidbits about people and players in our industry...

Working hard from a new desk… Dee Crosby left the Bay Area after more than 30 years to move to Arizona to work as the US Client Education and Engagement Lead at Solium. Aimee Serna is a Sr. Stock Administrator at AMD. Jessica Castro is a Sr. Equity Compensation Consultant for Mulesoft. Robin Silke is now a Field Client Service Manager for Charles Schwab. Bobbi Miller is a Stock Plan Administrator for Talend.

All ready… Achaessa James of Equity Plan Solutions, LLC has finally opened the first two apartments of her guest house in San Miguel de Allende.  You can see photos here and she wants you to come visit soon!

On the mend… Elizabeth Dodge, of Equity Plan Solutions, LLC, had hip surgery to repair a tear in her labrum on October 25th. This is the same surgery that ARod had, because clearly, equity compensation is just as physically taxing as the MLB. She is recovering nicely and should be back to her hobby of ref’ing youth soccer in a few months.

Industry News… Certent, a leading provider of equity compensation solutions, recently announced an enhanced collaboration with Charles Schwab.  The new integration alleviates the manual data management processes for equity plan administrators and provides participants with simplified access to brokerage services. Read more here. Baker McKenzie shares an urgent alert on a Significant Impact on Equity-Based Compensation Under Proposed Tax Reform Bill.

SOS’s newest team member…

Jim Lecher, People Solutions

From the SOS LibraryYear End Communications

From the SOS Webcast Archive...SOS Educational Webcast: The End is Near: Preparing and Checking your Year-end List (Twice!)

Stock & Option Solutions Logo

SOS Xtra Editor: Shawna Casey
Did you miss an issue of Xtra? View our complete newsletter archive from our website here.
Miss a webcast? You can find links to recordings, as well as the materials, on our webcast page.

Information provided in this newsletter is designed for educational and entertainment purposes only and is not provided as professional service or advice. Moreover, this newsletter should not be relied on as legal, accounting, auditing, or tax advice. Anyone reading this newsletter should not act upon this information without seeking professional counsel and/or input from their advisers. The preceding information does not necessarily represent the official views of Stock & Option Solutions, Inc. with respect to any of the issues addressed.