Certified Equity Professional Institute...–Employee Stock Purchase Plan =Topics covered –Characteristics of equity awards ... –The length of time during which equity can be granted

Certified Equity Professional Institute

Exam Overview Webinars

Certified Equity Professional Institute © 2011 http://cepi.scu.edu

L1 Exam Overview WebinarEquity Plan Design, Analysis, and Administration

The information presented herein is of a general nature and has been simplified for presentation to a large audience. It is not a complete discussion of all aspects the laws, rules, regulations, standards, and principles that govern equity compensation plans. The contents are neither designed nor intended to be relied upon, and should not be considered, as legal, tax or accounting advice. Your specific situation may involve circumstances that cause the laws, rules, regulations, standards and principles described herein to apply differently. You should consult your own advisors before deciding what, if any, course of action to take in your own particular situation.

© 2019 Certified Equity Professional Institute cepi.scu.edu -2-

= 30% of the Level One Exam is Equity Plan Design, Analysis, and Administration

= Read and understand the plan documents– XYZ Equity Incentive Plan– Employee Stock Purchase Plan

= Topics covered– Characteristics of equity awards– Governing and supporting documents– Transfer agent reserves– Understanding of transactional functions

Overview


Grant and Award Terminology

= Grant= Vesting

– Definition: The process of earning shares– Calculating Vesting

= Standard Vesting – option granted that vests annually over a four-year period.

= 10,000 shares granted on 1/1/20152,500 shares vest on 1/1/20162,500 shares vest on 1/1/20172,500 shares vest on 1/1/20182,500 shares vest on 1/1/2019

= Exercise– Definition: Exercising the right to purchase the stock under the option grant


Grant and Award Terminology

= Plan Term– The length of time during which equity can be granted under the specific plan

document.

= Grant Term– The period of time that the grant is outstanding – the period between grant

date and exercise date or termination of the grant contract. – Typically, between five and ten years.

= Expiration– The date when the option or SAR is no longer exercisable


Grant Types

= Stock Option– Contractual right to purchase a certain number of shares of stock at a certain

price over a defined period of time– Shares issued at time of exercise after award has vested.

= Stock Appreciation Right (SAR)– Right to payment in the amount of the appreciation of shares between the

grant date and exercise date– May settle in shares or cash

= Phantom Stock– Right to the value of a set number of shares– Pays out on a specified date


Restricted Stock

= Characteristics– Awarded at no cost (or at a nominal price)– Shares are earned subject to vesting requirements

= Shares are non-transferable until vested= Subject to forfeiture if employee terminates prior to vesting

Previously issued stock is repurchased at cost by the company= Vesting may be based on performance criteria


Restricted Stock

= Restricted stock awards (RSAs)– Stock is issued at grant and released to employee upon vesting– Generally eligible for voting and dividends while restricted

= Restricted stock units (RSUs) – Stock is issued to employee upon vesting. – Cannot be voted until issued and are not eligible for dividends– May be eligible for dividend equivalents


Restricted Stock= Tax payment methods

– Cash= Difficult to collect payments from employees

– Withhold to cover= Company withholds shares to cover taxes= Cash outflow for employer= Can trigger liability accounting if shares are tendered for tax payments in excess

of maximum individual rate – Sell-to-cover

= Shares sold in market to cover tax withholding= No cash outflow for employer= Requires assistance of broker (and resultant brokerage fees)= Sale volume can be a problem if large number of shares are paid out on the

same day= Insider and affiliate issues


Basic ESPP Features

= ESPP features– Enrollment date

= Enrollment process– Offering period– Price determination

= Discount– Purchase date– Purchase period

January 1FMV $10

Enrollment Date

June 30FMV $12

Purchase Date

December 31FMV $8

Purchase Date

Offering Period

Purchase Period Purchase Period


Basic Plan Provisions

= Administration of the plan

= Death

= Disability/LOA

= Dividends and dividend equivalent rights

= Eligible Employees (tax or non-tax related)– ESPP– Options

= Fair market value definition

= Merger and acquisition application

= Stock splits

= Minimum exercise price

= Share reserves

= Termination

= Transferability– Divorce– TSOs


Governing and Supporting documents

= Plan prospectus

= Grant agreement– Name of grant recipient– Type of award or option– Number of shares covered by award or option– Option exercise price– Vesting schedule

= Notice of exercise


Exercise Methods

= Cash exercise (also known as exercise and hold)– The participant exercises the option and purchase and holds the shares.

= Cashless exercise– Immediate sale of stock to cover exercise costs

= Sale proceeds are used to pay option price and any related withholding taxes– Special considerations

= Sale is disqualifying disposition of ISO shares= Sale is subject to short-swing profits recovery provisions under Section 16 (for

officers and directors)= Sale must comply with Rule 144 for affiliates

Form 144 must be filed


Exercising Methods= Cash exercise / exercise and hold

– 100 shares exercisable with an option price of $10 per share (100 x $10 = $1,000 exercise price)

– Participant decides to exercise and delivers:= Completed exercise notice= Total payment of $1,000= Any necessary withholding taxes

– 100 shares delivered to participant= Net exercise

– Upon exercise, the issuer withholds the number of shares with a value equal to the full exercise price= Example:

Participant holds an option grant for 1,000 shares priced at $10 per share; current FMV for the company is $25 per share.

Total cost of the option is $10,000 ($10 x 1,000)Company withholds 400 shares ($10,000 / $25)600 shares issued to the participant

= Additional shares usually withheld to cover taxes


Exercising Methods

= Broker-assisted cashless exercise methods– 100 shares exercisable with an option price of $10 per share (100 x $10 = $1,000

exercise price)– Current FMV $25 per share

= Same-day sale– 40 shares sold to cover exercise price, $1,500 delivered to participant

= 40 shares delivered to broker to pay $1,000 needed to exercise all 100 options = $1,500 (minus commissions) delivered to participant ($25 FMV x 60 shares)= Additional shares usually withheld to cover required withholding taxes

= Sell to cover– 40 shares sold to cover exercise price, 60 shares released to optionee

= 40 shares delivered to broker to pay $1,000 needed to exercise all 100 options = 60 shares (minus commissions) delivered to participant = Additional shares usually withheld to cover required withholding taxes


Contractual andAdministrative Issues

= Stock splits– Aggregate value remains the same

= Forward split 4-for-1; each shareholder receives 4 shares for each single share they own. Stock price is divided by 4.

Option for 100 shares at $10 per share (total price $1,000) becomesOption for 400 shares at $2.50 per share (total price $1,000)

= Reverse split 1-for-4; each shareholder receives 1 share for each 4 shares they own. Stock price is multiplied by 4.

Option for 100 shares at $10 per share (total price $1,000) becomesOption for 25 shares at $40 per share (total price $1,000)

– Split ratio is generally applied to:= Outstanding stock options= Shares available for grant under the plan


Educational Courses to Assist In Exam Preparation

– NASPP= https://www.nasppuniversity.com

– NCEO= http://www.nceo.org/training/cepstudy.html

Although the CEP Institute makes this information available to candidates, we do not endorse educational programs. The candidate must determine whether the program is suitable for his/her needs.

https://www.nasppuniversity.com/

http://www.nceo.org/training/cepstudy.html

Certified Equity Professional Institute...–Employee Stock Purchase Plan =Topics covered –Characteristics of equity awards ... –The length of time during which equity can be granted

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