Equity Compensation DLA Piper, Palo Alto, CA June 2, 2012

1. EQUITY COMPENSATION
Roger Royse
Royse Law Firm, PC
1717 Embarcadero Road
Palo Alto, CA 94303
rroyse@rroyselaw.com
www.rroyselaw.com DLA Piper,
Skype: roger.royse Palo Alto, CA
June 21st, 2012
IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this
communication, including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1)
avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.

2. EQUITY COMPENSATION
Overview
• Restricted Stock
• Section 83(b) Elections
• Restricted Stock Units
• Phantom Stock
• Stock Options
• Incentive Stock Options
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3. RESTRICTED STOCK
• Stock granted to an employee subject to
vesting restrictions
• Vesting restrictions must give rise to a
“substantial risk of forfeiture,” e.g.
• Performance benchmarks
• Fixed employment period
• Taxed when vesting restrictions lapse
• Ordinary income = fair market value of
shares on date restrictions lapse less
amount paid by employee (if any)
• Withholding tax obligation
• Employer deduction mirrors amount and
timing of employees’ taxation
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4. RESTRICTED STOCK CONT…
Section 83(b) election
• Election to be taxed on fair market value of the stock on date shares
received
• Revocable in limited circumstances
• Risky – no adjustment for shares forfeited or decreased in value
• Frequently used tax planning strategy in start-ups with low (or zero) fair
market value for their stock
• Election procedure (30 days)
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5. RESTRICTED STOCK CONT…
Other Considerations
• Dividends taxable as compensation income
• $1 million compensation limitation
• Restricted stock deductible if dependent
on performance-based criteria
• S Corporations
• Restricted stock ignored for 100
shareholder limitation
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6. RESTRICTED STOCK UNITS
• Unsecured promise by the employer to issue a set number of shares of
stock after vesting
• E.g. Facebook to issue stock six months after IPO
• No voting or dividend rights
• No Section 83(b) election available
• Employee taxed on FMV of stock at date of vesting
• Taxed as ordinary income
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7. PHANTOM STOCK
• Promise to pay a bonus based on
increase in value of shares or as a
percentage of a future liquidity event
• Employee receives cash not stock
• Provides incentive without giving up
equity
• Employees need to stay with the
company to participate
• Taxable as compensation
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8. STOCK OPTIONS
• No tax on grant if option has no readily ascertainable market
value
• Not “in the money” on grant of the option i.e. exercise price
cannot be less than market value of the stock
• If the shares have vested then taxed on exercise
• Ordinary income = fair market value of shares less exercise
price
• Following exercise, If shares have not vested then taxed when
the shares vest
• Section 83(b) election available
• Employer deduction on exercise
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9. INCENTIVE STOCK OPTIONS
• Incentive stock options:
• Cannot be outstanding for more than
10 years (5 years in some cases);
• Not granted to someone who owns
more than 10% of the company’s stock
unless exercise price is at least 110%
of fair market value;
• Not in respect of over $100,000 of
stock per option holder per year
(measured as option vests)
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10. INCENTIVE STOCK OPTIONS CONT…
• Not taxed on grant or on exercise
• Taxed as capital gain on eventual disposal of shares unless
“disqualifying disposition”
• Amount taxed = proceeds less amount paid
• Other Considerations
• No employer deduction
• Ordinary income for Alternative Minimum Tax purposes
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12. PALO ALTO LOS ANGELES SAN FRANCISCO
1717 Embarcadero Road 11150 Santa Monica Blvd., 135 Main Street,
Palo Alto, CA 94303 Suite 1200 12th Floor
Los Angeles, CA 90025 San Francisco, CA 94105
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