Creating viable stock option incentive plans can be a “win-win situation” for business owners, simultaneously benefiting employees while also increasing productivity.  However, it’s important for employers to approach these plans carefully. While a well-crafted incentive plan can be a boon to employers and the workforce, a poorly-crafted plan which violates state or federal laws can be a legal and financial disaster leading to litigation, bad publicity, and the imposition of debilitating fines.

The knowledgeable business attorneys of Bellatrix PC have experience assisting entities of all sizes and legal structures prepare robust and meticulous stock option plans which comply with all laws and requirements.  We will walk you through each and every step of the legal process, explaining your rights and responsibilities while helping you make advantageous decisions that meet your business goals.

To set up a confidential legal consultation, call the law offices of Bellatrix PC at (800) 449-8992.  Let’s start discussing how our team can help yours.

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Incentive vs. Non-Qualified Stock Options: Tax Considerations

When done correctly, granting stock options benefits both employee and employer.  Employees are provided with a financial stake in the company, and feel an increased sense of ownership in their work and accomplishments.  In order to increase the stock price, these vested and dedicated employees will work extremely hard toward increasing the employer’s bottom line.  As a result, the employer will benefit by seeing less turnover and higher levels of performance, as stock-holding employees tend to be more loyal to their employers than non-stock holding employees.

The first step in creating a stock option plan is to decide whether the plan will include incentive stock options, or non-qualified stock options.  The key difference between these options is the way in which they are taxed.

Incentive stock options let employees avoid paying tax on their shares, at least until the shares are sold.  As a result, employees receive a deferred tax incentive.  Additionally, if the employee keeps the stock for (1) a minimum of two years from the date the option was granted, and (2) a minimum of one year from the exercise date, then he or she may be eligible for a long-term capital gains tax option.

By comparison, non-qualified stock options, which are sometimes called statutory stock options, do not enjoy the same benefits with regard to paying taxes.  Because non-qualified options are taxed both as capital gains and as income, they are seen as income and therefore treated like compensation, which is more heavily taxed.  Despite these shortcomings, non-qualified options also have a significant advantage in that they are easier to pass down to children.

As there are two types of stock options, there are two types of vesting schedules as well.  Some stock options vest immediately, while others vest over time according to a vesting schedule outlined by the stock option plan.  Employers typically offer immediate vesting stock options to employees as part of their employment offer agreement.  Options that vest over time are also valuable to employers, as this creates an incentive for employees to remain employed by the business for longer periods of time.  These types of options can vest over a set number of months or years, or can be performance-based options that vest incrementally when performance goals are met.

Public vs. Private Businesses

When creating a stock option plan, it is important to keep three main aspects in mind: tax aspects, securities aspects, and business aspects.  These aspects vary depending on whether the business is privately or publicly held.

For a publicly-held business, the securities aspects are minimal, because the shares that will be covered by the option are typically subject to a registration statement.  Likewise, the tax aspects for a public business are usually not excessively complex, because it is relatively simple to satisfy the requirements for a statutory or incentive stock option plan in the public company context.

Issues pertaining to securities and tax remain comparatively simple for privately-held business which intend to remain private, provided the group of covered employees is restricted to high-level executives and key officers who do not plan on selling their stocks in the immediate future.  However, these tax and securities issues become increasingly complex as more and more employees become covered.

While management of tax and securities issues is difficult enough, the third aspect which employers must consider — the business aspect — can become extremely complex.  If a privately-held company intends to provide all employees with stock options, but also intends to become public in the future, not only must the associated plan account for variables like financial, tax, and accounting requirements — it must also avoid undermining the needs of future investment bankers and underwriters when the organization transitions from private to public.

Contact Our Employment Law Attorneys

If your business is contemplating creating a stock option plan for its employees, it’s important to consult with an employment law lawyer with stock option experience.  The attorneys of Bellatrix PC will sit down with you to identify the most important aspects of your business’ proposed stock option plan.  We will then address vulnerabilities, draft a plan according to your requirements, guide you on execution, and help ensure that all state and federal laws are met.

If you are interested in offering stock or taking your company public, Bellatrix PC can help. Call us today at (800) 449-8992 to schedule your confidential legal consultation.

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