Ever wonder what the pros and cons to stock options are? Well, wonder no more- that information is here for you! In addition, this presentation provides valuable information for both emploees and employers and fast facts about non-statutory or non'qualified stock options which may be issued to employes as well as non-employees such as contractors and freelancers. Andrew Cooper, CPA (Quinn Lobel & Associates, P.C.) co-hosts.

1. Stock Options and Restricted Stock
Equity
Andrew T. Mirsky
Mirsky & Company, PLLC
Mirsky & Company, PLLC (“Kenyon”) has provided this presentation for general informational purposes only. It is not intended as professional
counsel and should not be used as such. You should contact your attorney to obtain advice with respect to any particular issue or problem.

2. Andrew T. Mirsky, Esq.
• Principal, Mirsky & Company, PLLC, DC and NY
• Formerly in-house counsel with National Journal
and Atlantic Monthly magazines
• Clients in new media and technology, including
intellectual property, corporate and finance,
privacy, joint ventures and partnerships, and
employment and HR matters.
• Founder, Media Future Now
(www.mediafuturenow.com)

3. Two Types of Stocks
ISOs •Incentive
(Incentive)
•(Non-statutory or
NSOs Nonqualified)

4. Who May Receive?
ISOs
• Employees only (and must be exercised within 3
months of leaving company)
NSOs
• Employees and contractors and anybody else.
NSOs can be given to anyone, including vendors,
partners, freelancers, your mother … anybody.

5. Pricing
ISOs
Must be granted at (or above) fair market
value. (Section 409A Rules)
NSOs
Can be priced below (or above) current
market value.

6. Holding Period
ISOs
1+ year from exercise
and 2+ years from
grant. Required.
NSOs
none, BUT: if disposition occurs prior to 1 year
after exercise, taxed at ordinary, not cap gains.

7. When taxable to recipient?
• Not taxable upon grant. Not taxable
upon exercise. Taxable only upon
disposition of underlying stock, and at
ISOs
(more favorable) capital gains rate.
Therefore: If never exercised, never
taxable.
• Not taxable upon grant. Taxable at
exercise (ordinary) based on spread
NSOs between exercise price and FMV.
Taxable upon disposition (cap gains or
ordinary), and at higher basis than ISO.

8. What Type of Tax?
Taxable upon disposition (not exercise) at
ISOs capital gains rate, based on appreciation
between exercise price and price at
disposition.
NSOs Taxable at exercise as ordinary income, and
taxable upon disposition at capital gains rate.

9. Deductibility (for Company)
ISOs
Not deductible as compensation
NSOs
Company gets deduction (at exercise, not
grant). This can be significant.

10. When Exercised
ISOs
Must be exercised within 3 months
of termination of employment
(otherwise, gets treated as NSO.
NSOs
No
limitation.

11. AMT
ISOs
•Potentially Problematic
NSOs
•Practically speaking, not affected.

12. Restricted Stock
Stock (i.e. actual stock, not options) that is
“substantially nonvested”, meaning:
Subject to “substantial risk of forfeiture”, i.e.
subject to repurchase at less than FMV if employee
leaves Company and “non-transferable” without
risk of forfeiture. Restricted
Stock
Grantee is true “shareholder” with all rights of
owners (voting rights, distribution rights,
information rights, etc.).

13. Who May Receive?
Employees and non-employees
• Contractors
• Freelancers
• Vendors, etc.

14. Pricing
If stock has value
• employee required to pay $$ for
purchase (unlike options)
• Otherwise, grant = compensation
However, with new
companies with startup value
• stock may not yet have value, so
cost may be negligible.

15. Holding Period
Typically
• forfeiture and repurchase terms allowing
buyback at cheap cost if grantee leaves
company during “holding” period
As with any stock ownership
• possible shareholder restrictions on
transferability

16. When taxable to recipient?
No income tax upon grant until vesting restrictions lapse
Then tax as compensation at ordinary income rate
Section 83(b) election: Grantee may elect or recognize income
immediately (rather than post-vesting and post-appreciation)
upon grant based on FMV of underlying stock
• Downsides: 1. pay tax now, but at a potentially lower rate than later and 2.
potential forfeiture

17. Deductibility (for Company)
Does the Grantee make
83(b) election?
If yes:
• Company gets deduction for
compensation.
No?
• Then company gets deduction
when restrictions relapse

18. Q+A
Q: AMT implications – how might the AMT be
increasingly reducing tax benefits of ISOs? Is
this true?

19. Q+A
A: Yes, it’s possible. For ISOs, benefits of (a) no
tax on exercise and (b) deferred tax until
disposition possibly offset by obligation to pay
AMT based on disposition. Additional problem
of difficulty to calculate.

20. Q+A
Q: Section 83(b): S corps often require restricted
stock recipients to make 83(b) election.
(Otherwise, employee owns stock and may be
legally entitled to all rights as a shareholder
(including distributions), but may not be
responsible for taxable share of profits.) So,
requiring 83(b) election causes employee to
recognize income now and thus dilutes taxable
income of all owners.

21. Q+A
A: (If recipient does not make a Section 83(b)
election, he or she is not deemed to own the
stock for tax purposes until vesting. Any
distributions made with respect to the stock
before vesting are treated as compensation
payments. If the corporation is an S corporation,
the recipient does not report any of the
corporation’s undistributed income, even
though he or she might be entitled to receive a
share of the income if later distributed.

22. Q+A
A (cont.): It is not unusual, therefore, for S
corporations to require recipients of restricted
stock to make Section 83(b) elections. Absent a
Section 83(b) election, the shares are not
treated as being outstanding for S corporation
qualification purposes until they have vested.)

23. Q+A
Q: Are these the only ownership options for
employees?

24. Q+A
A: No

25. Q+A
Q: What about founders – what kind of
ownership?
Q: What about vesting and forfeiture?
Q: What kinds of companies can issue stock
options? LLCs? S corps?

26. Q+A
Q: Why would a company not want to issue
NSOs? Since company gets a deduction for
compensation, wouldn’t this be attractive?

27. Q+A
A: LLCs. Options difficult with LLC “membership
interests”, and ISO tax treatment not IRS-
recognized for LLCs.
Restricted stock structure more flexible than
options, since options must comply with IRS
rules.

28. Q+A
Q: (Company perspective) Under what
circumstances would a company want to issue
restricted stock in preference to stock options?

29. Q+A
A: (1) Gives employees better sense of true,
immediate “ownership”, (2) less cumbersome
than dealing with IRS option rules (e.g. FMV and
Section 409A valuation rules), (3) somewhat
easier to tailor transfer and other restrictions

30. Q+A
Q: (Company perspective) Under what
circumstances would a company want to issue
stock options in preference to restricted stock?

31. Q+A
A: (1) Does not actually give up ownership yet, and
not having to deal with new shareholder demands,
(2) (with NSOs) company gets compensation
deduction at exercise, (3) For key employees,
incentivizes success of Company and thus improve
“spread” between stock value and exercise price,
(4) inability to run as a pass-through entity (S-corp)
if too many stockholders), (5) requirements of x% of
stockholders for approval of corporate transactions,
etc.

32. Q+A
Q: What is the major distinction between
restricted stock and stock options?

33. Q+A
A: With restricted stock, grantee becomes
actual shareholder immediately (but not for tax
purposes unless 83(b) election). Stock is
actually issued to the employee (or non-
employee), subject to vesting and Company
repurchase rights.

34. Andrew T. Mirsky
andy@mirskylegal.com
(202) 339-0303
www.mirskylegal.com
@mirskylegal
2301 N Street, NW 318 West 14th Street
Suite 313 4th Floor
Washington, DC 20037 New York, NY 10014