October 14, 2009
Volume 2, No.10
In this Issue:
What Clients Are Saying About SOS
Webinar on October 21st: Sweet Smell of Stock Plans IT Success
SOS Focus: Preparing Stock Plans for IPO
Product Spotlight: Modification Accounting
Participant Communication Topic: ESPP in a Down Market
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What SOS Clients Are Saying
Some of you may already know that SOS recently rolled out a more formalized process to collect our clients' feedback after (and in some cases during) each SOS project. We're sending out an incredibly brief survey that allows our clients to rate our performance and tell us the primary reason(s) they gave us the rating they did. This gives SOS the data we need to continue to improve our service and products and help us serve you better.So far the reviews have been overwhelmingly positive. Here are a few excerpts of what our clients have been saying (and the products and services they're been saying them about):
- The project was completed in a timely manner, and the information was valuable and understandable.
(International Feasibility Analysis) - The SOS service was responsive and tailored itself well to our needs. The setup time met our expectations and the quality of the service we received was very satisfactory. The packaging of the service that we engaged was equally flexible to meet our needs. Many thanks SOS!!
(Vendor Implementation) - Expert people and quality products
(Tender Offer Website) - SOS is very responsive to my needs and assigns the most knowledgeable people for the project. Also, I appreciate the flexibility as the project timeline can change over time.
(Exchange Ratio Calculator) - Exchange offer website project went very smoothly from start to finish. Great product, great project management, great responsiveness to customization requests, and very reasonable fees!
(Tender Offer Website)
Pam Ellis, COO
Stock & Option Solutions
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Free Webcast:
Sweet Smell of Stock Plan IT Success: Secrets to Hitting a Homerun with Your Next Stock Plan IT Project
October 21st
Please join us for our next free webinar on Wednesday, October 21st at 11am Pacific Time, 2pm Eastern Time
DescriptionHave you ever implemented a technology solution for a stock plan need, whether a custom report, data exchange process, or software upgrade, that didn't go as smoothly as planned? Didn't produce the results you were expecting? Went over budget or wasn't delivered on time? Was far more complex than anticipated?
We have your solutions! Whether you have in-house IT resources or outsource to a third-party service provider, our next webcast will arm you with the secrets to success for your various stock plan IT-related projects. We'll share ways to consistently ensure you bring technology related projects to the finish line on-time, within-budget, and with desired or better-than-expected results!
This panel of experts will review the kinds of stock plan projects that require IT success strategies, discuss areas in the process where you, as an equity compensation professional, must focus most attention, identify the most common reasons for failures, unveil the easiest ways to guarantee success, and explain why you cannot afford to overlook these tips!
Speakers:
- Steve Gaylord, Stock & Option Solutions
- Barbara Richley, CEP, E*TRADE Corporate Services
(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.)
SOS Focus: Tips from the Trenches - Preparing Stock Plans for an IPO
Finally, there are signs of life in the long-comatose Initial Public Offering ("IPO") sector of the market. A gradual surge in client needs around IPO services suggested to us the tide might be turning at last, and then voila, our instincts proved on track when the week ending September 25th marked the most active for IPOs in nearly two years, with 7 companies commencing public trading.While market signs are encouraging, extreme volatility continues in some sectors. We are learning that nothing is as predictable as it seems at the outset, least of all an IPO. A year ago we had several private-company clients who engaged us for IPO-related services, anticipating their needs for increased infrastructure and the processes to support themselves as a newly public company. These clients were pillars of planning and organization, seeking to lay as much groundwork as possible BEFORE the IPO. As market conditions deteriorated, companies would say "yes, we ARE going public... soon... dependent on market conditions". Thus a waiting game began. Waiting diligently for those "market conditions" to do whatever it was they were going to do to trigger that IPO. Diligence turned to patience, patience turned to impatience, and finally the waiting game dissolved into a state of "someday". Someday it will happen, someday.
For some companies, "someday" came all too quickly. After months of waiting, hoping, and finally letting go of today in favor of the distant future, the game was back on and the company really was going public NOW. Several IPOs hit the market recently with only a few weeks of internal notice. The following are some tips we've gathered as we've worked with IPO clients in these volatile, unpredictable markets.
Someday Could Mean Tomorrow:
Determining the "when" around an IPO can be a challenging game. What we've learned is that the "when" doesn't matter so much if the company truly intends to IPO in the short-term. Many companies made diligent efforts when an IPO felt imminent, but then relaxed as market conditions gave way to unpredictability. What happened? A quick decision to launch the IPO and everyone found themselves scrambling. In retrospect, the planning and preparations never should have ceased. Generally speaking, outline the roadmap and stick to it, even if market conditions appear to delay the ultimate IPO date. You'll thank yourself for being ahead of the game and minimizing the frenzied rush that occurs when the final IPO timeframe is determined.
Evaluate and Update Equity Plan Recordkeeping
A significant percentage of private companies don't invest in stock plan recordkeeping systems until they reach the planning stages for an IPO. Even companies who do have some form of system or service provider to perform recordkeeping find that their post-IPO needs will be very different from their pre-IPO needs, necessitating a change. Many companies underestimate the timeframe involved in evaluating and selecting a service provider, leaving this decision until weeks before, or even after, the IPO. Service provider selection and implementation can take several months. This action item should be one of the early items on the IPO infrastructure list. If possible, begin this evaluation 9 to 12 months prior to your IPO. In your search for a service provider, be sure to ask whether they will be able to accommodate any delays in your IPO timeframe, and the differences in how they will treat you as a "private" client vs. "public" client.
Develop Process Roadmap
With an IPO inevitably come many process changes. There are more accounting, compliance and reporting requirements, you may have a different service provider, implementation of brokerage services and participant trading, and so on. Identify areas where you anticipate new processes and compare them to your existing infrastructure. For example, do you need to build processes to support eventual Section 16 reporting? How will you handle employee brokerage transactions? Map out the new processes and identify action items that must be completed in advance to ensure a smooth transition to the new process. As we've seen first hand, doing this before the IPO will minimize transitional issues during a very busy time.
Communicate, Communicate!
As companies focus on the procedural things related to the IPO, employee communication often finds itself low on the priority list. You work so hard to build the processes and infrastructure - be sure your employees are well informed so that they have a smooth transition as well. FAQ documents for employee questions are a must. Typical FAQs address questions around the IPO timing, mechanics, lock up, brokerage accounts and actions required by the employee, and what the employee can expect in relation to his or her own equity benefits. Other key communications include presentations and emails designed to keep employees informed along the way.
As we said in the beginning, there is nothing predictable in today's markets, except the unpredictable. Sticking to an advance plan will ensure the groundwork is in place before it's needed, avoiding manual and interim fixes, and potential for errors and compliance failures during the first weeks and months as a public company. So when someday means TODAY, you can focus on the few remaining critical tasks without losing sleep over all the countless things that could've, should've been done yesterday.
Questions on this article? Need assistance preparing for an IPO of your own? We can help! Email us!
Product Spotlight: SOS Modification Accounting Solutions
Our customized accounting solutions streamline and simplify your modification accounting and reporting calculations, save you time and reduce risk by leaving spreadsheets behind.
Option exchange programs, spin-offs, and other changes to the original terms of your equity grants will often trigger modification accounting. Yet, since the adoption of FAS123(R), few systems have a complete solution for companies seeking to avoid the error-prone and burdensome process of crunching the numbers on spreadsheets.
SOS' custom-built accounting solutions can help. Our Accrual/True Up, DTA/APIC, and Diluted EPS solutions offer automation and flexibility for companies grappling with the complexities of modification accounting. These solutions can be implemented at your site, in conjunction with any equity system, or can be run by SOS subject matter experts as a shared-services solution. In either case, the solution is tailored to meet your unique business demands, while easing your financial reporting requirements.
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General Feature Overview (Common to All Solutions)
- Store necessary information often not tracked by stock plan databases, which may include:
- Grant relationship details
- Original fair value / Incremental fair value / Original DTA
- Tranche-by-tranche DTA for replacement grants (for options granted prior to the adoption of FAS 123(R))
- Information retrieved from:
- Stock plan database tables (only available with certain versions of in-house software)
- Report output tables
- Exports from outsourcing providers
- Support exchanges in which several grants are replaced by one
- Includes grant- and participant-specific fields to allow you to slice and dice expense
- Displays cancelled or fully-vested grants to ease period-to-period reconciliation
- Flawless spreadsheet output - no more misaligned columns or difficult-to-work-with data
- Customized to your specifications
- Solutions can be implemented at your site and can be written in Microsoft Access or as Oracle scripts, or can be run by SOS subject matter experts remotely
- Training on use of the tools, and documentation providing formulas underlying the calculations are provided with these programs
- Supports both pooled and bifurcated accrual approaches
- Supports true straight-line accrual, vest-tranche straight-line, and tranche-by-tranche (FIN 28) accrual
- Applies estimated forfeiture rates and trues up for forfeitures at vest (static) or termination (dynamic)
- Deferred Tax Asset calculations based on grant-level or input tax rates
- If pooled approach is used, trues up expense at termination based on original and new vest dates reached at the time of termination
- Includes original and incremental expense when calculating DTA to reverse and impact to APIC
- Calculates Windfall/Shortfall (excess/deficiency) APIC/Tax Expense
- Determines APIC impact based on status of each vest tranche (forfeitures of replacement grants may impact APIC because they are "expirations" under the original terms of the grant)
- Uses both the previously accrued DTA plus any incremental expense for the necessary tax benefit and average unamortized calculations
- Recalculates impact on quarterly Diluted EPS based on modification accounting for tax benefits (and in some cases accrual)
For more information, please feel free to contact us at xtra@sos-team.com. Also available: materials and a recording from our previous webcast on modification accounting.
Participant FAQ of the Month: ESPP in a Down Market
By myStockOptions.comHow is my ESPP stock sale taxed when the stock price quickly rises after a big drop or keeps falling?
ESPP taxation can be confusing to begin with, and even more so in a down market and, afterwards, when stock prices quickly rise. When you satisfy the holding-period requirements for tax-qualified ESPPs, you still have ordinary income for the portion of the gain equal to your company's discount (e.g., 5%, 10%, or 15%) from the offering/start price, regardless of the actual purchase price for the stock, and even if there is no lookback.
Ordinary income is this amount or the actual gain at sale, whichever is lower. When stock is sold at a loss, you have no ordinary income, just a capital loss.
However, when you sell the stock early in a disqualifying disposition (sale within one year from acquisition), only the spread at exercise is ordinary income. With this early sale, you will have this ordinary income, even though you have no actual gain because the stock price dropped after purchase.
With a tax-qualified ESPP, the breakdown of ordinary income and capital gains depends on when you sell the stock and its price. This can create tax oddities. It is usually better to have capital gains than ordinary income, as capital gains can be netted against capital losses.
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Example: The start-date price is $20. The stock price drops so that the purchase-date price is $10. The 15% discount results in an $8.50 purchase price.
Example with sale when stock price jumps to $15. Hold long enough: have $3 in ordinary income (15% of $20 start price) and $3.50 in capital gain ($15 sale price minus ESPP stock that has $11.50 tax basis). Sell sooner: have $1.50 in ordinary income ($10 market price at purchase minus $8.50 purchase price) and $5 in capital gain ($15 sale price minus ESPP stock with $10 tax basis). In this situation, where the stock price quickly rose after the purchase date, the early sale results in more capital gain income than the sale after one year did.
Example with sale when stock price drops to $5. If you wait to sell the stock until one year after it drops to $5, you will have a $3.50 short-term capital loss and no ordinary income (when the loss is greater than ordinary income, it is all capital loss). If you sell before one year elapses, you will have $1.50 in ordinary income and a $5 short-term capital loss.
SOS Across Our Desk: Equity Compensation in the News...
TaxBoth Wisconsin and California have changed their tax rates applicable to equity compensation withholding...
Option Exchanges
Sypris Solutions gets reprimand from NASDAQ Over Option Exchange...
International
Spain: Supreme Court overrules regulation on stock option gains... Proposed Changes to EU Prospectus Directive... China Clarifies Tax Treatment Of Equity-Based Incentive Compensation...
Accounting
Amendments to IFRS 2 - Group Cash-settled Share-based Payment Transactions... SEC to refocus on IFRS roadmap-official...
Option Backdating
Prosecution scores in legal wrangling ahead of Broadcom options trial... Blackberry co-CEOs face a multi-million dollar fine from the market regulatory body... Ex-McAfee attorney sues for defamation in backdating case...
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SOS Xposé
...tender tidbits about people and players in our industry...Congrats!... Tim Mercer of eHealthinsurance.com and his wife, Angela, welcomed Audrey Grace Mercer to the family on August 14th...
On the Move!... Carol Rose-Guerin has begun work as Manager, Stock Administration, at Palm... the NCEO is seeking a new Executive Director to start in 2011... Fred Whittlesey has joined The Hay Group to Work with West Coast Clients...
Defies Categorization... October marks the 3rd anniversary of the infamous "kiss" involving Terry Adamson and James Lecher, both of Radford Consulting. Want to hear the story? Ask Terry...
Players... E*TRADE Corporate Services Launches New Online Equity Compensation Management Platform... UBS Wealth Management U.S. is pleased to announce that its Corporate Employee Financial Services (CEFS) business has been awarded the prestigious ISO 27001 Certification for its equity compensation administration business... myStockOptions.com has developed a flexible, dynamic online directory that connects stock grant holders with the financial, tax, or legal advisors they need... Net Worth Strategies has established a LinkedIn Group for Equity Compensation Recipients to provide information and a forum for stock plan participants to help them make timely and informed decisions regarding their grants. OptionEase Inc. has announced that it was recognized by the Southern California Venture Network as the "Emerging Startup of 2009"... Transcentive Releases Express Equity Suite of Products, Version 11.0...