Alternative Investments and Equity Compensation
Equity Compensation:
Equity Compensation: Determination of
Income Available for Support; Complex
Income Calculations; Vesting, Timing and
Tax Considerations
Speakers
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STRUCTURE AND COMPENSATION IN
ALTERNATIVE ASSET MANAGEMENT
COMPANIES
3
What are Alternative Investments?
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•
Unconventional assets with potential for high return
•
Not cash, stocks or bonds
•
Complex in nature, limited regulation (usually private
companies), usually limited liquidity
•
“Accredited investors” and “qualified clients” are usually institutional
investors i.e. pensions, endowments, and high net worth individuals
What are Alternative Investments? (
cont.
)
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•
T
y
p
e
s
o
f
A
l
t
e
r
n
a
t
i
v
e
I
n
v
e
s
t
m
e
n
t
s
:
•
Hedge Funds (HF)
•
Private Equity (PE)
•
Venture Capital (VC)
•
Other (BDCs, real estate [including REITs], commodities, derivatives)
[
not discussed in this presentation
]
Types of Alternative Investment Funds
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Typical Fund Structure
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7
$
Typical Fund Structure (
cont.
)
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•
GPs generally manage multiple funds with overlapping
investment periods
•
Fund agreements dictate when new funds can be raised by
GPs/investment manager (generally once current fund is at least 75%
invested)
•
Primary funds invest money put in by LPs into Portfolio Companies
•
“
A
f
f
i
l
i
a
t
e
”
o
r
“
S
i
d
e
-
I
n
v
e
s
t
m
e
n
t
”
f
u
n
d
s
i
n
v
e
s
t
p
e
r
s
o
n
a
l
m
o
n
e
y
p
u
t
i
n
b
y
G
P
s
a
n
d
t
h
e
i
r
f
r
i
e
n
d
s
i
n
t
o
s
a
m
e
P
o
r
t
f
o
l
i
o
C
o
m
p
a
n
i
e
s
a
l
o
n
g
s
i
d
e
p
r
i
m
a
r
y
f
u
n
d
i
n
v
e
s
t
m
e
n
t
Primary Sources of Revenue for Alternative Asset Management Firms
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•
M
a
n
a
g
e
m
e
n
t
F
e
e
s
:
•
Charge for having the fund’s assets professionally managed
•
Used to cover operating expenses, after which can be distributed to the
owners of the firm pro-rata
•
Payments can occur quarterly, semi-annually or annually (set by LP
agreement)
Primary Sources of Revenue for Alternative Asset Management Firms
(
cont.
)
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10
•
M
a
n
a
g
e
m
e
n
t
F
e
e
s
(
c
o
n
t
.
)
:
•
Generally, 2-3% of fund’s capital commitments and can taper off over
time (PEs / VCs)
•
Provide “base income” for partners in the early days of the partnership
•
As an advance against their carried interest
•
Taxed at ordinary income tax rates
Primary Sources of Revenue for Alternative Asset Management Firms
(
cont.
)
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11
•
P
e
r
f
o
r
m
a
n
c
e
F
e
e
s
/
C
a
r
r
i
e
d
I
n
t
e
r
e
s
t
:
•
The portion of profits of the fund received by the fund managers/GPs
when they generate positive returns
•
For support purposes, because the timing and amount is variable, would
use a bonus table.
•
For HF,
performance fees
are generally 20% of a fund’s increase in net
asset value. Fund must meet investor hurdle rate and hit “high-water mark”
for GPs to share in performance fees.
Primary Sources of Revenue for Alternative Asset Management Firms
(
cont.
)
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12
•
P
e
r
f
o
r
m
a
n
c
e
F
e
e
s
/
C
a
r
r
i
e
d
I
n
t
e
r
e
s
t
(
c
o
n
t
.
)
:
•
For PE and VC, generally referred to as
carried interest (carry)
:
•
Share of investment gains that go into GPs
•
Only achieved when profits exceed the hurdle rate
•
Carry can be clawed-back if the fund underperforms over time
•
Typically, 20%-25% of fund’s profit on sale of portfolio investments
•
Taxed at capital gains tax rate even though this is a form of compensation
Allocation of Profits between GPs and LPs
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13
•
D
i
s
t
r
i
b
u
t
i
o
n
W
a
t
e
r
f
a
l
l
-
d
i
c
t
a
t
e
s
h
o
w
d
i
s
t
r
i
b
u
t
i
o
n
s
f
r
o
m
s
a
l
e
o
f
u
n
d
e
r
l
y
i
n
g
i
n
v
e
s
t
m
e
n
t
s
a
r
e
p
r
i
o
r
i
t
i
z
e
d
b
e
t
w
e
e
n
f
u
n
d
G
P
s
a
n
d
L
P
s
.
•
American (deal by deal) waterfall
•
European (whole fund/cumulative) waterfall
Allocation of Profits between GPs and LPs
(
cont.
)
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14
•
A
m
e
r
i
c
a
n
(
d
e
a
l
b
y
d
e
a
l
)
W
a
t
e
r
f
a
l
l
:
•
GP receives a percentage of profit distributions once capital contributions
and preferred return on the
current exited investment
are returned to
investors.
•
Can be subject to
clawback
if later investments in the fund are sold at a
loss
Allocation of Profits between GPs and LPs
(
cont.
)
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15
•
E
u
r
o
p
e
a
n
(
w
h
o
l
e
f
u
n
d
/
c
u
m
u
l
a
t
i
v
e
)
W
a
t
e
r
f
a
l
l
:
•
GP receives carry only after all capital contributions for both realized
and unrealized investments, plus full preferred return on aggregate
capital contributions of the fund are returned to investors
•
No clawback issues
because no carry distributed to GP until LPs receive
100% of capital plus hurdle rate
Income Available for Support
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16
•
F
i
r
s
t
s
t
e
p
–
d
e
t
e
r
m
i
n
e
i
f
t
h
e
p
a
r
t
y
i
s
a
n
:
1.
Investor
2.
Employee
3.
Income Partner
4.
Equity Partner / Owner
Income Available For Support - Investor
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17
•
F
o
r
I
n
v
e
s
t
o
r
s
/
F
u
n
d
C
o
-
i
n
v
e
s
t
m
e
n
t
s
:
•
Passive investment that can be divided in kind
•
Parties will receive a Schedule K-1
•
Return on investment generally reported on Schedule B (interest and
dividends) and Schedule D (capital gains) of personal tax return
•
No business valuation required
Income Available For Support - Employee
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18
•
F
o
r
E
m
p
l
o
y
e
e
s
:
•
Items reported on
personal tax return
:
•
W-2 salary and bonus income
•
Post separation earnings are separate property
•
Any bonus should be based on a time rule
•
Will receive a K-1 from the GP entity through which carried interest income will
be received
•
Carry generally reported on Schedule D
•
Co-invest generally reported on Schedule B and Schedule D
Income Available For Support – Employee (
cont.
)
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19
•
F
o
r
E
m
p
l
o
y
e
e
s
:
•
May need to perform a carry allocation (similar to stock option / RSU
allocation) to determine character of income
•
Generally, no management fees
•
No business valuation required
Income Available For Support – Income Partner
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20
•
I
n
c
o
m
e
P
a
r
t
n
e
r
(
n
o
t
a
n
o
w
n
e
r
)
:
•
Items reported on
personal tax return
:
•
May receive a W-2
•
Will receive a K-1 from the GP entity through which carried interest income
will be received
•
Carry generally reported on Schedule D
•
Co-invest generally reported on Schedule D
•
May receive management fees reported on Schedule E
Income Available For Support – Income Partner (
cont.
)
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21
•
I
n
c
o
m
e
P
a
r
t
n
e
r
(
n
o
t
a
n
o
w
n
e
r
)
:
•
May need to perform a carry allocation (similar to stock option / RSU
allocation) to determine character of income
•
No business valuation required
Income Available For Support – Owner / Equity Partner
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22
•
O
w
n
e
r
/
E
q
u
i
t
y
P
a
r
t
n
e
r
:
•
Items reported on
personal tax return
:
•
May receive a W-2
•
Will receive a K-1 from the GP entity through which carried interest income
will be received
•
Carry generally reported on Schedule D
•
Co-invest generally reported on Schedule B and Schedule D
•
Management fees generally reported on Schedule E
Income Available For Support – Owner / Equity Partner (
cont.
)
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23
•
O
w
n
e
r
/
E
q
u
i
t
y
P
a
r
t
n
e
r
:
•
May need to perform a carry allocation (similar to stock option / RSU
allocation) to determine character of income
•
Business valuation potentially required
Income Available For Support Recap Based on Position at Company
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24
STOCK STRUCTURE & COMPENSATION
FOR START-UPS & OTHER PRIVATE &
PUBLIC COMPANIES
25
25
Dual-Class Stock Structure
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26
P
r
e
f
e
r
r
e
d
S
t
o
c
k
C
o
m
m
o
n
S
t
o
c
k
Compensatory
purpose --
Low price,
Residual rights
I
n
v
e
s
t
o
r
s
F
o
u
n
d
e
r
s
M
a
n
a
g
e
m
e
n
t
a
n
d
E
m
p
l
o
y
e
e
s
Investment
purpose --
High price,
Preferences and
senior rights
Types of Employee Equity
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27
•
F
o
u
n
d
e
r
s
’
S
t
o
c
k
•
R
e
s
t
r
i
c
t
e
d
S
t
o
c
k
•
S
t
o
c
k
O
p
t
i
o
n
s
:
•
I
n
c
e
n
t
i
v
e
S
t
o
c
k
O
p
t
i
o
n
s
(
“
I
S
O
s
”
)
•
N
o
n
-
s
t
a
t
u
t
o
r
y
(
o
r
“
N
o
n
-
q
u
a
l
i
f
i
e
d
”
)
S
t
o
c
k
O
p
t
i
o
n
s
(
“
N
S
O
s
”
)
•
O
t
h
e
r
T
y
p
e
s
o
f
E
q
u
i
t
y
C
o
m
p
e
n
s
a
t
i
o
n
:
•
R
e
s
t
r
i
c
t
e
d
S
t
o
c
k
U
n
i
t
s
(
“
R
S
U
s
”
)
•
P
e
r
f
o
r
m
a
n
c
e
S
t
o
c
k
U
n
i
t
s
(
“
P
S
U
s
”
)
•
S
t
o
c
k
A
p
p
r
e
c
i
a
t
i
o
n
R
i
g
h
t
s
(
“
S
A
R
s
”
)
a
n
d
“
P
h
a
n
t
o
m
S
t
o
c
k
”
•
Profits Interests
Stock Options - Generally
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28
•
W
h
a
t
i
s
a
n
O
p
t
i
o
n
?
•
A right to buy a fixed number of shares at a fixed price
•
The right can be exercised at any time up to a specified expiration date
•
No direct investment risk until exercised
•
U
s
u
a
l
l
y
,
t
h
e
n
u
m
b
e
r
o
f
s
h
a
r
e
s
t
h
a
t
m
a
y
b
e
p
u
r
c
h
a
s
e
d
u
p
o
n
e
x
e
r
c
i
s
e
i
n
c
r
e
a
s
e
s
p
r
o
g
r
e
s
s
i
v
e
l
y
o
r
“
v
e
s
t
s
”
o
v
e
r
t
i
m
e
•
Generally, vesting is over four years with a 1-year “Cliff”
Types of Stock Options
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29
•
T
w
o
t
y
p
e
s
o
f
O
p
t
i
o
n
s
:
•
“
I
n
c
e
n
t
i
v
e
S
t
o
c
k
O
p
t
i
o
n
s
”
o
r
“
I
S
O
s
”
•
Created by Tax Code
•
All other Options
•
“
N
o
n
-
s
t
a
t
u
t
o
r
y
o
p
t
i
o
n
s
,
”
“
N
o
n
-
q
u
a
l
i
f
i
e
d
o
p
t
i
o
n
s
,
”
“
N
S
O
s
”
•
Difference is simply the tax treatment
Types of Stock Options
(
cont.
)
A
N
N
U
A
L
M
E
E
T
I
N
G
2
0
2
0
30
30
•
W
h
e
r
e
t
o
f
i
n
d
N
S
O
a
n
d
I
S
O
i
n
c
o
m
e
o
n
a
T
a
x
R
e
t
u
r
n
:
•
N
S
O
s
:
O
n
t
h
e
e
x
e
r
c
i
s
e
d
a
t
e
,
t
h
e
d
i
f
f
e
r
e
n
c
e
b
e
t
w
e
e
n
t
h
e
F
M
V
a
n
d
t
h
e
s
t
r
i
k
e
p
r
i
c
e
w
i
l
l
s
h
o
w
u
p
a
s
W
-
2
i
n
c
o
m
e
a
t
o
r
d
i
n
a
r
y
i
n
c
o
m
e
t
a
x
r
a
t
e
s
.
U
p
o
n
s
a
l
e
,
t
h
e
d
i
f
f
e
r
e
n
c
e
b
e
t
w
e
e
n
t
h
e
F
M
V
o
n
e
x
e
r
c
i
s
e
a
n
d
F
M
V
o
n
s
a
l
e
s
h
o
w
s
u
p
o
n
t
h
e
S
c
h
e
d
u
l
e
D
o
f
a
t
a
x
r
e
t
u
r
n
a
s
c
a
p
i
t
a
l
g
a
i
n
s
o
r
l
o
s
s
e
s
.
•
I
S
O
s
:
O
n
t
h
e
e
x
e
r
c
i
s
e
d
a
t
e
,
t
h
e
d
i
f
f
e
r
e
n
c
e
b
e
t
w
e
e
n
t
h
e
F
M
V
a
n
d
t
h
e
s
t
r
i
k
e
p
r
i
c
e
w
i
l
l
s
h
o
w
u
p
o
n
t
h
e
A
l
t
e
r
n
a
t
i
v
e
M
i
n
i
m
u
m
T
a
x
(
A
M
T
)
S
c
h
e
d
u
l
e
o
n
t
h
e
t
a
x
r
e
t
u
r
n
b
a
s
e
d
o
n
A
M
T
t
a
x
r
a
t
e
s
.
U
p
o
n
s
a
l
e
,
t
h
e
d
i
f
f
e
r
e
n
c
e
b
e
t
w
e
e
n
t
h
e
F
M
V
o
n
e
x
e
r
c
i
s
e
a
n
d
F
M
V
o
n
s
a
l
e
s
h
o
w
s
u
p
o
n
t
h
e
S
c
h
e
d
u
l
e
D
o
f
a
t
a
x
r
e
t
u
r
n
a
s
c
a
p
i
t
a
l
g
a
i
n
s
o
r
l
o
s
s
e
s
.
Types of Stock Options (
cont.
)
M
I
D
-
Y
E
A
R
M
E
E
T
I
N
G
|
2
0
2
4
31
31
•
T
a
x
e
v
e
n
t
s
i
n
t
h
e
l
i
f
e
o
f
a
n
O
p
t
i
o
n
:
1.
Grant of option
2.
Exercise of option
3.
Sale of shares received upon exercise of Option
Types of Stock Options (
cont.
)
M
I
D
-
Y
E
A
R
M
E
E
T
I
N
G
|
2
0
2
4
32
32
•
T
a
x
t
r
e
a
t
m
e
n
t
o
f
a
n
N
S
O
(
d
e
f
a
u
l
t
s
i
t
u
a
t
i
o
n
)
:
1.
N
o
t
a
x
a
t
t
i
m
e
o
f
G
r
a
n
t
:
•
No tax event
•
But exercise price must be at least equal to the Fair
Market Value of the underlying Common Stock on the
date of Grant
Types of Stock Options (
cont.
)
M
I
D
-
Y
E
A
R
M
E
E
T
I
N
G
|
2
0
2
4
33
33
•
T
a
x
t
r
e
a
t
m
e
n
t
o
f
a
n
N
S
O
(
d
e
f
a
u
l
t
s
i
t
u
a
t
i
o
n
)
(
c
o
n
t
.
)
:
2.
T
a
x
e
d
a
t
t
i
m
e
o
f
E
x
e
r
c
i
s
e
:
•
Taxed at Ordinary Income on the difference in value between Exercise
Price and the FMV at time of Exercise.
•
Subject to withholding and payroll taxes
•
Optionee may have incur significant deduction from salary and may
even have to write a check to cover withholding
Types of Stock Options (
cont.
)
M
I
D
-
Y
E
A
R
M
E
E
T
I
N
G
|
2
0
2
4
34
34
•
T
a
x
t
r
e
a
t
m
e
n
t
o
f
a
n
N
S
O
(
d
e
f
a
u
l
t
s
i
t
u
a
t
i
o
n
)
(
c
o
n
t
.
)
:
3.
T
a
x
a
t
t
i
m
e
o
f
S
a
l
e
o
f
U
n
d
e
r
l
y
i
n
g
•
Taxed at long-term Capital Gain on the difference in value between the
Fair Market Value at Exercise and the FMV sale price, as long as the
stock has been held for more than 1 year
Types of Stock Options (
cont.
)
M
I
D
-
Y
E
A
R
M
E
E
T
I
N
G
|
2
0
2
4
35
35
•
S
t
o
c
k
O
p
t
i
o
n
s
:
I
S
O
s
a
n
d
N
S
O
s
(
c
o
n
t
.
)
•
One of the main differences is that ISOs can only be granted to
employees, while NSOs can be granted to consultants, advisors, and
directors as well as employees.
•
If NSOs work for both, then why do most early-stage companies grant their
employees equity options in the form of ISOs instead of NSOs?
•
The answer
: When it comes to tax treatment, ISOs have special
advantages for employees.
•
Because the exercise of NSOs is considered compensation, they result
in a tax deduction for the issuing corporation – the employer.
Types of Stock Options (
cont.
)
M
I
D
-
Y
E
A
R
M
E
E
T
I
N
G
|
2
0
2
4
36
36
•
I
n
c
e
n
t
i
v
e
S
t
o
c
k
O
p
t
i
o
n
s
(
“
I
S
O
s
”
)
:
•
Incentive stock options (ISOs) may only be offered to employees and expire
10 years after their issue. At most companies, they typically expire 90 days
after employment is terminated, but some companies allow a longer window.
•
ISOs almost always come with a vesting schedule.
•
ISOs must be equal to the FMV at the date of the grant. Upon exercise,
there are AMT tax liabilities incurred on the amount the FMV exceeded the
option price at exercise. If exercising and selling simultaneously, the sale
portion would show up on tax return Schedule D.
•
ISOs stock, once exercised and held is taxable at the long-term capital gains
rate if the stock is held for at least one year after exercise and the option
grant date is over two years prior to the sale.
Types of Stock Options (
cont.
)
M
I
D
-
Y
E
A
R
M
E
E
T
I
N
G
|
2
0
2
4
37
37
•
N
o
n
-
s
t
a
t
u
t
o
r
y
(
o
r
“
N
o
n
-
q
u
a
l
i
f
i
e
d
”
)
S
t
o
c
k
O
p
t
i
o
n
s
(
“
N
S
O
s
”
)
:
•
NSOs do not qualify for ISO treatment, NSOs are the simpler of these two
forms of stock options.
•
They may include a vesting schedule or may not.
Types of Stock Options (
cont.
)
M
I
D
-
Y
E
A
R
M
E
E
T
I
N
G
|
2
0
2
4
38
38
•
N
o
n
-
s
t
a
t
u
t
o
r
y
(
o
r
“
N
o
n
-
q
u
a
l
i
f
i
e
d
”
)
S
t
o
c
k
O
p
t
i
o
n
s
(
“
N
S
O
s
”
)
(
c
o
n
t
.
)
:
•
T
a
x
a
t
i
o
n
o
n
N
S
O
s
f
i
r
s
t
o
c
c
u
r
s
w
h
e
n
t
h
e
y
a
r
e
e
x
e
r
c
i
s
e
d
a
n
d
i
s
b
a
s
e
d
o
n
t
h
e
s
p
r
e
a
d
b
e
t
w
e
e
n
t
h
e
f
a
i
r
m
a
r
k
e
t
v
a
l
u
e
(
F
M
V
)
o
f
t
h
e
s
t
o
c
k
a
t
t
h
e
t
i
m
e
o
f
p
u
r
c
h
a
s
e
a
n
d
t
h
e
e
x
e
r
c
i
s
e
p
r
i
c
e
(
a
l
s
o
c
a
l
l
e
d
s
t
r
i
k
e
p
r
i
c
e
)
o
f
s
u
c
h
o
p
t
i
o
n
s
.
•
The difference between the exercise price and FMV is treated as ordinary
income tax, not capital gains. As such, they'll be taxed at the ordinary income
tax rate. They'll also be charged employment taxes if they are an employee.
•
To qualify for long-term capital gains treatment on the sale of stock
purchased through an NSO is the same as listed above for an ISO.
Other Forms of Equity Compensation
M
I
D
-
Y
E
A
R
M
E
E
T
I
N
G
|
2
0
2
4
39
39
•
R
e
s
t
r
i
c
t
e
d
S
t
o
c
k
U
n
i
t
s
(
“
R
S
U
s
”
)
:
•
A
c
o
m
p
a
n
y
'
s
p
r
o
m
i
s
e
t
o
g
i
v
e
a
s
p
e
c
i
f
i
c
n
u
m
b
e
r
o
f
s
h
a
r
e
s
o
f
s
t
o
c
k
o
r
c
a
s
h
e
q
u
i
v
a
l
e
n
t
t
o
a
n
e
m
p
l
o
y
e
e
a
t
a
f
u
t
u
r
e
d
a
t
e
,
o
n
c
e
v
e
s
t
e
d
.
•
R
e
s
t
r
i
c
t
e
d
S
t
o
c
k
i
s
a
n
y
s
t
o
c
k
t
h
a
t
i
s
s
u
b
j
e
c
t
t
o
a
r
i
g
h
t
o
f
r
e
p
u
r
c
h
a
s
e
u
p
o
n
t
e
r
m
i
n
a
t
i
o
n
o
f
e
m
p
l
o
y
m
e
n
t
p
r
i
o
r
t
o
v
e
s
t
i
n
g
.
•
Generally, the company can repurchase the shares at the original purchase
price
•
[Notice the similarity - Founders’ Stock is really just a special case of
Restricted Stock.]
•
Same as Restricted Stock Awards except the shares are not issued until
they are vested.
Other Forms of Equity Compensation
(
cont.
)
M
I
D
-
Y
E
A
R
M
E
E
T
I
N
G
|
2
0
2
4
40
40
•
R
e
s
t
r
i
c
t
e
d
S
t
o
c
k
U
n
i
t
s
(
“
R
S
U
s
”
)
:
•
In public companies, RSUs are generally issued for no consideration and
the employee makes no payment for the stock.
•
In private companies, RSUs are generally purchased by the employee at a
price equal to current FMV.
Other Forms of Equity Compensation
(
cont.
)
M
I
D
-
Y
E
A
R
M
E
E
T
I
N
G
|
2
0
2
4
41
41
•
R
e
s
t
r
i
c
t
e
d
S
t
o
c
k
U
n
i
t
s
(
“
R
S
U
s
”
)
:
•
Vesting is typically based simply on time.
•
Sometimes it is tied to performance metrics, usually in public companies
•
The circumstances of termination generally don’t matter.
•
Vesting stops upon any termination.
•
Vesting may be accelerated for:
•
Acquisition of Company (“Single Trigger”)
•
Termination after acquisition of Company (“Double Trigger”).
Other Forms of Equity Compensation
(
cont.
)
M
I
D
-
Y
E
A
R
M
E
E
T
I
N
G
|
2
0
2
4
42
42
•
R
e
s
t
r
i
c
t
e
d
S
t
o
c
k
U
n
i
t
s
(
“
R
S
U
s
”
)
:
•
RSUs are assigned a fair market value when they vest. Upon vesting, they are
considered income, and a portion of the shares are withheld to pay income
taxes. The employee receives the remaining shares and can sell them at their
discretion.
•
The taxable income is the FMV of the shares at vesting. The income is subject
to federal and employment tax (Social Security and Medicare) and any state
and local tax.
•
Most companies do not withhold enough to cover all the income taxes on RSU
compensation, as employees generally are in a higher tax bracket than what
the company withholds, so employees generally still owe additional taxes on
the RSUs in that tax year the RSUs vested.
Other Forms of Equity Compensation
(
cont.
)
M
I
D
-
Y
E
A
R
M
E
E
T
I
N
G
|
2
0
2
4
43
43
•
R
e
s
t
r
i
c
t
e
d
S
t
o
c
k
U
n
i
t
s
(
“
R
S
U
s
”
)
:
•
R
e
c
i
p
i
e
n
t
s
c
a
n
c
h
o
o
s
e
t
o
b
e
t
a
x
e
d
i
m
m
e
d
i
a
t
e
l
y
o
n
d
i
f
f
e
r
e
n
c
e
a
t
t
i
m
e
o
f
p
u
r
c
h
a
s
e
b
y
f
i
l
i
n
g
“
8
3
(
b
)
E
l
e
c
t
i
o
n
”
•
The employee receiving the RSUs must file the “83(b) Election” with IRS
within 30 days of receiving the stock.
•
N
O
E
X
C
E
P
T
I
O
N
S
•
Generally, an “83(b) Election” is always filed where Restricted Stock was
purchased.
•
Compare that an “83(b) Election” is usually never filed where the RSUs
were issued to the employee for no payment.
Other Forms of Equity Compensation
(
cont.
)
M
I
D
-
Y
E
A
R
M
E
E
T
I
N
G
|
2
0
2
4
44
44
•
P
e
r
f
o
r
m
a
n
c
e
S
t
o
c
k
U
n
i
t
s
(
“
P
S
U
s
”
)
:
•
P
S
U
s
a
r
e
a
c
o
m
p
a
n
y
'
s
p
r
o
m
i
s
e
t
o
g
i
v
e
a
t
a
r
g
e
t
e
d
n
u
m
b
e
r
o
f
s
h
a
r
e
s
o
f
s
t
o
c
k
o
r
c
a
s
h
e
q
u
i
v
a
l
e
n
t
t
o
a
n
e
m
p
l
o
y
e
e
a
t
a
f
u
t
u
r
e
t
i
m
e
,
o
n
c
e
v
e
s
t
e
d
.
•
The actual number of shares given will vary based on performance as
measured against the defined goals.
•
Same as RSUs, except vesting based upon performance metrics rather than
merely time.
•
The Metrics may be Company performance, individual performance or a
combination of both.
Other Forms of Equity Compensation
(
cont.
)
M
I
D
-
Y
E
A
R
M
E
E
T
I
N
G
|
2
0
2
4
45
45
•
P
e
r
f
o
r
m
a
n
c
e
S
t
o
c
k
U
n
i
t
s
(
“
P
S
U
s
”
)
:
•
Tax treatment of a PSU
(default situation):
•
Employees granted PSUs are not required to pay income taxes on the
PSUs on the Grant Date.
•
PSUs are taxed at ordinary income tax rates when the underlying
Shares are delivered to the employee.
•
The amount of ordinary income recognized will be the value of the
PSUs when vested.
Other Forms of Equity Compensation (
cont.
)
A
N
N
U
A
L
M
E
E
T
I
N
G
2
0
2
0
46
46
•
S
t
o
c
k
A
p
p
r
e
c
i
a
t
i
o
n
R
i
g
h
t
s
(
“
S
A
R
s
”
)
a
n
d
P
h
a
n
t
o
m
S
t
o
c
k
:
•
T
h
e
s
e
a
r
e
m
e
t
h
o
d
s
f
o
r
c
o
m
p
a
n
i
e
s
t
o
g
i
v
e
t
h
e
i
r
m
a
n
a
g
e
m
e
n
t
o
r
e
m
p
l
o
y
e
e
s
a
c
a
s
h
b
o
n
u
s
i
f
t
h
e
c
o
m
p
a
n
y
p
e
r
f
o
r
m
s
w
e
l
l
f
i
n
a
n
c
i
a
l
l
y
.
PLEASE REFER TO SUPPLEMENTAL MATERIALS FOR ADDITIONAL
INFORMATION ON THESE TYPES OF COMPENSATION
EQUITY COMPENSATION: VESTING
CONSIDERATIONS
47
47
Performance Fees/Carried Interest
M
I
D
-
Y
E
A
R
M
E
E
T
I
N
G
|
2
0
2
4
48
48
•
Performance fees/carried interest percentage participation is
generally set at the beginning of a new fund
•
Increases and/or decreases in percentage participation during the
life of the fund based on performance on particular investments
(employees & owners), new employees admitted, employees
leaving the firm
Performance Fees/Carried Interest - Vesting
M
I
D
-
Y
E
A
R
M
E
E
T
I
N
G
|
2
0
2
4
49
49
•
Vesting at fund level vs. portfolio company level
•
Fund level over life of fund,
generally not ratable (7-10 years)
•
Portfolio company level over life of portfolio company investment,
generally ratable (3-4 years)
•
Different than vesting of stock compensation in that
employees/owners receive 100% of the performance/carried
interest granted to them unless they leave the firm
•
i.e. divestiture schedule rather than vesting schedule
Typical
Four-Year Vesting for RSUs and Stock Options
M
I
D
-
Y
E
A
R
M
E
E
T
I
N
G
|
2
0
2
4
50
50
Vesting* of remaining 75,000 shares
at 1/36th per month (2,083 shares)
100,000
share
certificate
Fully
vested
75,000
shares
vested
1 year
25,000
shares
vested
50,000
shares
vested
*Unvested shares subject to company right to repurchase at cost
EQUITY COMPENSATION: TIME
CONSIDERATIONS
51
51
Timing Considerations re: Alternative Asset Management
M
I
D
-
Y
E
A
R
M
E
E
T
I
N
G
|
2
0
2
4
52
52
•
W-2 salary received ratably throughout the year
•
Bonus usually received 1x per year
•
Management fees received periodically throughout year (e.g.
quarterly, semi-annually) but vary in amount
•
Carried interest (VC/PE) paid on exit of portfolio investment;
amount and timing of receipt varies year to year and taxed as
capital gains
Timing Considerations re: Alternative Asset Management (
cont.
)
M
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Y
E
A
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E
T
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2
0
2
4
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53
•
Performance fees (Hedge Funds) generally crystallize 1x per year
but may have continued vesting provisions; amount varies year to
year and taxed as capital gains
•
What components of income should base support be calculated on
versus bonus support upon receipt of additional income?
•
Potential claw back for PE/VC firms and how to recapture support
paid on clawed back incentive compensation
•
What components of income should base support be calculated on
Timing Considerations re: Stock Compensation
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54
•
What was the vesting start date?
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Original vesting start date, vesting start date based on
subsequent agreements/restrictions for founders
•
When does the stock vest?
•
When are all restrictions on the stock released?
•
Blackout dates, lock-up periods, etc.
Time Considerations: Subsequent Gains/Losses on Stock Sales
A
N
N
U
A
L
M
E
E
T
I
N
G
2
0
2
0
55
55
•
Current case law in California states that the support payor owes support at
the time their equity compensation vests, regardless of whether or not they
actually exercise the options (options only).
•
Consider what happens if the support is paid at the date of vest, but then the
vested options are exercised at a later date.
•
Further, consider what happens when the previously exercised shares are sold
at a price that differs from the fair market value back at the date of vest.
•
In California, this is the Macilwaine case. Other jurisdictions may have similar
case law.
•
In California, the payor may owe bonus support on any additional income (whether
from exercising options at a higher price or selling stock from previously exercised
options) received over the initial income included for support purposes.
Time Considerations: Subsequent Gains/Losses on Stock Sales (
cont.
)
A
N
N
U
A
L
M
E
E
T
I
N
G
2
0
2
0
56
56
•
S
h
o
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l
d
s
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b
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a
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a
i
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a
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f
o
r
s
u
p
p
o
r
t
?
•
Consider possible factors of each individual case
situation
:
•
Are they non-recurring capital gains/losses?
•
Where they reinvested proceeds (per the Pearlstein Case)
•
Other Factors?
Timing Considerations re: Stock Compensation
(
cont.
)
M
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2
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57
•
I
s
t
h
e
r
e
a
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i
q
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a
t
e
t
h
e
s
t
o
c
k
?
•
Public vs. private company, insider restrictions, 10b5-1 plans
•
How often should true-ups be prepared for public stock
compensation?
•
Cost/benefit analysis of more frequent true-ups vs. periodic true-ups
when considering changes in value of stock over true-up period
Timing Considerations: Support Paid in Stock vs. Cash
A
N
N
U
A
L
M
E
E
T
I
N
G
2
0
2
0
58
58
•
C
r
e
a
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i
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a
y
s
t
o
s
t
r
u
c
t
u
r
e
s
u
p
p
o
r
t
:
•
Potentially pay support in shares vs. cash if parties agree to circumvent
restrictions. Can only proceed if by agreement of the parties.
•
Support at a federal level is supposed to be a tax-free exchange of money, so
when someone receives shares in lieu of cash as a form of a support payment,
the support payor still reports 100% of the income associated with receiving
the shares. However, the tax basis in the shares would transfer to the
recipient of support, so the recipient only pays gain on any sales proceeds
above the FMV on or about the date of receipt of shares.
•
Any version of this type of agreement would need to consider caps on the
number of shares paid and amount of time to extend the payment out in the
event a liquidation event did not occur until multiple years after a support
obligation terminated.
EQUITY COMPENSATION: PHANTOM
INCOME CONSIDERATIONS
59
59
Phantom Income Issues: Alternative Asset Management
A
N
N
U
A
L
M
E
E
T
I
N
G
2
0
2
0
60
60
•
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t
M
a
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a
g
e
m
e
n
t
(
A
A
M
)
:
•
Unlike American Waterfall arrangements, the European Waterfall avoid claw
backs by only distributing a portion of the carry to pay taxes on the phantom
income.
•
However, the employees of the AAM firm are taxed on 100% of their
allocation of carry even though they did not receive their full allocated
amount.
•
In later years, the employees are presumably receiving nontaxable income
on which income tax was already paid in previous years.
•
Look for these types of provisions in operating agreements of these entities
and then consult with a forensic expert to assist in preparing an accurate
DissoMaster calculation to account for the phantom income.
Phantom Income Issues: 83(b) Elections
M
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b
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f
i
l
i
n
g
“
8
3
(
b
)
E
l
e
c
t
i
o
n
”
•
The employee receiving the Stock options and/or RSUs must file the
“83(b) Election” with IRS within 30 days of receiving the stock if they elect
to do so.
•
N
O
E
X
C
E
P
T
I
O
N
S
•
Generally, an “83(b) Election” is generally filed where Restricted
Stock Award was purchased.
•
Compare that an “83(b) Election” is usually not filed where the RSUs
were issued to the employee for no payment.
Explore the world of alternative investments including private equity, venture capital, and hedge funds with a focus on equity compensation. Learn about complex income calculations, vesting, timing, and tax considerations. Discover how these unconventional assets with high return potential differ from traditional investments like cash, stocks, and bonds. Gain insights into the structure and compensation in alternative asset management companies, and understand the types of alternative investment funds available in the market.
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Presentation Transcript
Equity Compensation: Equity Compensation: Determination of Income Available for Support; Complex Income Calculations; Vesting, Timing and Tax Considerations
Speakers Mich le Bissada, CFLS, AAML, IAFL Flicker, Kerin, Kruger & Bissada LLP www.fkkblaw.com Marie Ebersbacher, CPA CBIZ www.cbiz.com Alexandra Peais, CPA Gursey | Schneider, LLP www.gursey.com American Association of Matrimonial Lawyers: Mid-Year Meeting March 12-15, 2024 2 M ID-YEAR M EETING | 2024
STRUCTURE AND COMPENSATION IN ALTERNATIVE ASSET MANAGEMENT COMPANIES 3
What are Alternative Investments? Unconventional assets with potential for high return Not cash, stocks or bonds Complex in nature, limited regulation (usually private companies), usually limited liquidity Accredited investors and qualified clients are usually institutional investors i.e. pensions, endowments, and high net worth individuals 4 M ID-YEAR M EETING | 2024
What are Alternative Investments? (cont.) Types of Alternative Investments: Hedge Funds (HF) Private Equity (PE) Venture Capital (VC) Other (BDCs, real estate [including REITs], commodities, derivatives) [not discussed in this presentation] 5 M ID-YEAR M EETING | 2024
Types of Alternative Investment Funds PRIVATE EQUITY Closed-ended funds with 10- year terms Illiquid investments (generally 3-5 years) Invest in private companies, real estate, or vehicles holding debt VENTURE CAPITAL Closed-ended funds with 10- year terms Illiquid investments (generally 3-7+ years) Invest in startups mostly in tech and life sciences HEDGE FUND Open-ended funds without term limits Highly liquid, hedge risk, focus on ST profit Invest in marketable securities Aim to restructure company operations to sell for profit Aim to increase startup value until it gets acquired or IPO s Consistently invest and re- balance portfolio Controlling ownership may hire/fire/replace management Minority ownership partners act as advisors Do not get involved with management of portfolio investments LT commitment w/ drawdowns LT commitment w/ drawdowns ST commitment w/ upfront investment 6 M ID-YEAR M EETING | 2024
Typical Fund Structure General Partners $ $ Portfolio Company A 2-3% Mgmt Fee 20-30% Carry $ Limited Partners Portfolio Company B VC/PE Fund $ $ Portfolio Company C $ Portfolio Company D 7 M ID-YEAR M EETING | 2024
Typical Fund Structure (cont.) GPs generally manage multiple funds with overlapping investment periods Fund agreements dictate when new funds can be raised by GPs/investment manager (generally once current fund is at least 75% invested) Primary funds invest money put in by LPs into Portfolio Companies Affiliate or Side-Investment funds invest personal money put in by GPs and their friends into same Portfolio Companies alongside primary fund investment 8 M ID-YEAR M EETING | 2024
Primary Sources of Revenue for Alternative Asset Management Firms Management Fees: Charge for having the fund s assets professionally managed Used to cover operating expenses, after which can be distributed to the owners of the firm pro-rata Payments can occur quarterly, semi-annually or annually (set by LP agreement) 9 M ID-YEAR M EETING | 2024
Primary Sources of Revenue for Alternative Asset Management Firms (cont.) Management Fees (cont.): Generally, 2-3% of fund s capital commitments and can taper off over time (PEs / VCs) Provide base income for partners in the early days of the partnership As an advance against their carried interest Taxed at ordinary income tax rates 10 M ID-YEAR M EETING | 2024
Primary Sources of Revenue for Alternative Asset Management Firms (cont.) Performance Fees / Carried Interest: The portion of profits of the fund received by the fund managers/GPs when they generate positive returns For support purposes, because the timing and amount is variable, would use a bonus table. For HF, performance fees are generally 20% of a fund s increase in net asset value. Fund must meet investor hurdle rate and hit high-water mark for GPs to share in performance fees. 11 M ID-YEAR M EETING | 2024
Primary Sources of Revenue for Alternative Asset Management Firms (cont.) Performance Fees / Carried Interest (cont.): For PE and VC, generally referred to as carried interest (carry): Share of investment gains that go into GPs Only achieved when profits exceed the hurdle rate Carry can be clawed-back if the fund underperforms over time Typically, 20%-25% of fund s profit on sale of portfolio investments Taxed at capital gains tax rate even though this is a form of compensation 12 M ID-YEAR M EETING | 2024
Allocation of Profits between GPs and LPs Distribution Waterfall - dictates how distributions from sale of underlying investments are prioritized between fund GPs and LPs. American (deal by deal) waterfall European (whole fund/cumulative) waterfall 13 M ID-YEAR M EETING | 2024
Allocation of Profits between GPs and LPs (cont.) American (deal by deal) Waterfall: GP receives a percentage of profit distributions once capital contributions and preferred return on the current exited investment are returned to investors. Can be subject to clawback if later investments in the fund are sold at a loss 14 M ID-YEAR M EETING | 2024
Allocation of Profits between GPs and LPs (cont.) European (whole fund/cumulative) Waterfall: GP receives carry only after all capital contributions for both realized and unrealized investments, plus full preferred return on aggregate capital contributions of the fund are returned to investors No clawback issues because no carry distributed to GP until LPs receive 100% of capital plus hurdle rate 15 M ID-YEAR M EETING | 2024
Income Available for Support First step determine if the party is an: 1. Investor 2. Employee 3. Income Partner 4. Equity Partner / Owner 16 M ID-YEAR M EETING | 2024
Income Available For Support - Investor For Investors / Fund Co-investments: Passive investment that can be divided in kind Parties will receive a Schedule K-1 Return on investment generally reported on Schedule B (interest and dividends) and Schedule D (capital gains) of personal tax return No business valuation required 17 M ID-YEAR M EETING | 2024
Income Available For Support - Employee For Employees: Items reported on personal tax return: W-2 salary and bonus income Post separation earnings are separate property Any bonus should be based on a time rule Will receive a K-1 from the GP entity through which carried interest income will be received Carry generally reported on Schedule D Co-invest generally reported on Schedule B and Schedule D 18 M ID-YEAR M EETING | 2024
Income Available For Support Employee (cont.) For Employees: May need to perform a carry allocation (similar to stock option / RSU allocation) to determine character of income Generally, no management fees No business valuation required 19 M ID-YEAR M EETING | 2024
Income Available For Support Income Partner Income Partner (not an owner): Items reported on personal tax return: May receive a W-2 Will receive a K-1 from the GP entity through which carried interest income will be received Carry generally reported on Schedule D Co-invest generally reported on Schedule D May receive management fees reported on Schedule E 20 M ID-YEAR M EETING | 2024
Income Available For Support Income Partner (cont.) Income Partner (not an owner): May need to perform a carry allocation (similar to stock option / RSU allocation) to determine character of income No business valuation required 21 M ID-YEAR M EETING | 2024
Income Available For Support Owner / Equity Partner Owner / Equity Partner: Items reported on personal tax return: May receive a W-2 Will receive a K-1 from the GP entity through which carried interest income will be received Carry generally reported on Schedule D Co-invest generally reported on Schedule B and Schedule D Management fees generally reported on Schedule E 22 M ID-YEAR M EETING | 2024
Income Available For Support Owner / Equity Partner (cont.) Owner / Equity Partner: May need to perform a carry allocation (similar to stock option / RSU allocation) to determine character of income Business valuation potentially required 23 M ID-YEAR M EETING | 2024
Income Available For Support Recap Based on Position at Company 24 M ID-YEAR M EETING | 2024
STOCK STRUCTURE & COMPENSATION FOR START-UPS & OTHER PRIVATE & PUBLIC COMPANIES 25
Dual-Class Stock Structure Founders Management and Employees Investors Preferred Stock Common Stock Compensatory purpose -- Low price, Residual rights Investment purpose -- High price, Preferences and senior rights 26 M ID-YEAR M EETING | 2024
Types of Employee Equity Founders Stock Restricted Stock Stock Options: Incentive Stock Options ( ISOs ) Non-statutory (or Non-qualified ) Stock Options ( NSOs ) Other Types of Equity Compensation: Restricted Stock Units ( RSUs ) Performance Stock Units ( PSUs ) Stock Appreciation Rights ( SARs ) and Phantom Stock Profits Interests 27 M ID-YEAR M EETING | 2024
Stock Options - Generally What is an Option? A right to buy a fixed number of shares at a fixed price The right can be exercised at any time up to a specified expiration date No direct investment risk until exercised Usually, the number of shares that may be purchased upon exercise increases progressively or vests over time Generally, vesting is over four years with a 1-year Cliff 28 M ID-YEAR M EETING | 2024
Types of Stock Options Two types of Options: Incentive Stock Options or ISOs Created by Tax Code All other Options Non-statutory options, Non-qualified options, NSOs Difference is simply the tax treatment 29 M ID-YEAR M EETING | 2024
Types of Stock Options (cont.) Where to find NSO and ISO income on a Tax Return: NSOs: On the exercise date, the difference between the FMV and the strike price will show up as W-2 income at ordinary income tax rates. Upon sale, the difference between the FMV on exercise and FMV on sale shows up on the Schedule D of a tax return as capital gains or losses. ISOs: On the exercise date, the difference between the FMV and the strike price will show up on the Alternative Minimum Tax (AMT) Schedule on the tax return based on AMT tax rates. Upon sale, the difference between the FMV on exercise and FMV on sale shows up on the Schedule D of a tax return as capital gains or losses. 30 ANNUAL M EETING 2020
Types of Stock Options (cont.) Tax events in the life of an Option: 1. Grant of option 2. Exercise of option 3. Sale of shares received upon exercise of Option 31 M ID-YEAR M EETING | 2024
Types of Stock Options (cont.) Tax treatment of an NSO (default situation): 1. No tax at time of Grant: No tax event But exercise price must be at least equal to the Fair Market Value of the underlying Common Stock on the date of Grant 32 M ID-YEAR M EETING | 2024
Types of Stock Options (cont.) Tax treatment of an NSO (default situation) (cont.): 2. Taxed at time of Exercise: Taxed at Ordinary Income on the difference in value between Exercise Price and the FMV at time of Exercise. Subject to withholding and payroll taxes Optionee may have incur significant deduction from salary and may even have to write a check to cover withholding 33 M ID-YEAR M EETING | 2024
Types of Stock Options (cont.) Tax treatment of an NSO (default situation) (cont.): 3. Tax at time of Sale of Underlying Taxed at long-term Capital Gain on the difference in value between the Fair Market Value at Exercise and the FMV sale price, as long as the stock has been held for more than 1 year 34 M ID-YEAR M EETING | 2024
Types of Stock Options (cont.) Stock Options: ISOs and NSOs (cont.) One of the main differences is that ISOs can only be granted to employees, while NSOs can be granted to consultants, advisors, and directors as well as employees. If NSOs work for both, then why do most early-stage companies grant their employees equity options in the form of ISOs instead of NSOs? The answer: When it comes to tax treatment, ISOs have special advantages for employees. Because the exercise of NSOs is considered compensation, they result in a tax deduction for the issuing corporation the employer. 35 M ID-YEAR M EETING | 2024
Types of Stock Options (cont.) Incentive Stock Options ( ISOs ): Incentive stock options (ISOs) may only be offered to employees and expire 10 years after their issue. At most companies, they typically expire 90 days after employment is terminated, but some companies allow a longer window. ISOs almost always come with a vesting schedule. ISOs must be equal to the FMV at the date of the grant. Upon exercise, there are AMT tax liabilities incurred on the amount the FMV exceeded the option price at exercise. If exercising and selling simultaneously, the sale portion would show up on tax return Schedule D. ISOs stock, once exercised and held is taxable at the long-term capital gains rate if the stock is held for at least one year after exercise and the option grant date is over two years prior to the sale. 36 M ID-YEAR M EETING | 2024
Types of Stock Options (cont.) Non-statutory (or Non-qualified ) Stock Options ( NSOs ): NSOs do not qualify for ISO treatment, NSOs are the simpler of these two forms of stock options. They may include a vesting schedule or may not. 37 M ID-YEAR M EETING | 2024
Types of Stock Options (cont.) Non-statutory (or Non-qualified ) Stock Options ( NSOs ) (cont.): Taxation on NSOs first occurs when they are exercised and is based on the spread between the fair market value (FMV) of the stock at the time of purchase and the exercise price (also called strike price) of such options. The difference between the exercise price and FMV is treated as ordinary income tax, not capital gains. As such, they'll be taxed at the ordinary income tax rate. They'll also be charged employment taxes if they are an employee. To qualify for long-term capital gains treatment on the sale of stock purchased through an NSO is the same as listed above for an ISO. 38 M ID-YEAR M EETING | 2024
Other Forms of Equity Compensation Restricted Stock Units ( RSUs ): A company's promise to give a specific number of shares of stock or cash equivalent to an employee at a future date, once vested. Restricted Stock is any stock that is subject to a right of repurchase upon termination of employment prior to vesting. Generally, the company can repurchase the shares at the original purchase price [Notice the similarity - Founders Stock is really just a special case of Restricted Stock.] Same as Restricted Stock Awards except the shares are not issued until they are vested. 39 M ID-YEAR M EETING | 2024
Other Forms of Equity Compensation (cont.) Restricted Stock Units ( RSUs ): In public companies, RSUs are generally issued for no consideration and the employee makes no payment for the stock. In private companies, RSUs are generally purchased by the employee at a price equal to current FMV. 40 M ID-YEAR M EETING | 2024
Other Forms of Equity Compensation (cont.) Restricted Stock Units ( RSUs ): Vesting is typically based simply on time. Sometimes it is tied to performance metrics, usually in public companies The circumstances of termination generally don t matter. Vesting stops upon any termination. Vesting may be accelerated for: Acquisition of Company ( Single Trigger ) Termination after acquisition of Company ( Double Trigger ). 41 M ID-YEAR M EETING | 2024
Other Forms of Equity Compensation (cont.) Restricted Stock Units ( RSUs ): RSUs are assigned a fair market value when they vest. Upon vesting, they are considered income, and a portion of the shares are withheld to pay income taxes. The employee receives the remaining shares and can sell them at their discretion. The taxable income is the FMV of the shares at vesting. The income is subject to federal and employment tax (Social Security and Medicare) and any state and local tax. Most companies do not withhold enough to cover all the income taxes on RSU compensation, as employees generally are in a higher tax bracket than what the company withholds, so employees generally still owe additional taxes on the RSUs in that tax year the RSUs vested. 42 M ID-YEAR M EETING | 2024
Other Forms of Equity Compensation (cont.) Restricted Stock Units ( RSUs ): Recipients can choose to be taxed immediately on difference at time of purchase by filing 83(b) Election The employee receiving the RSUs must file the 83(b) Election with IRS within 30 days of receiving the stock. NO EXCEPTIONS Generally, an 83(b) Election is always filed where Restricted Stock was purchased. Compare that an 83(b) Election is usually never filed where the RSUs were issued to the employee for no payment. 43 M ID-YEAR M EETING | 2024
Other Forms of Equity Compensation (cont.) Performance Stock Units ( PSUs ): PSUs are a company's promise to give a targeted number of shares of stock or cash equivalent to an employee at a future time, once vested. The actual number of shares given will vary based on performance as measured against the defined goals. Same as RSUs, except vesting based upon performance metrics rather than merely time. The Metrics may be Company performance, individual performance or a combination of both. 44 M ID-YEAR M EETING | 2024
Other Forms of Equity Compensation (cont.) Performance Stock Units ( PSUs ): Tax treatment of a PSU (default situation): Employees granted PSUs are not required to pay income taxes on the PSUs on the Grant Date. PSUs are taxed at ordinary income tax rates when the underlying Shares are delivered to the employee. The amount of ordinary income recognized will be the value of the PSUs when vested. 45 M ID-YEAR M EETING | 2024
Other Forms of Equity Compensation (cont.) Stock Appreciation Rights ( SARs ) and Phantom Stock: These are methods for companies to give their management or employees a cash bonus if the company performs well financially. PLEASE REFER TO SUPPLEMENTAL MATERIALS FOR ADDITIONAL INFORMATION ON THESE TYPES OF COMPENSATION 46 ANNUAL M EETING 2020
EQUITY COMPENSATION: VESTING CONSIDERATIONS 47
Performance Fees/Carried Interest Performance fees/carried interest percentage participation is generally set at the beginning of a new fund Increases and/or decreases in percentage participation during the life of the fund based on performance on particular investments (employees & owners), new employees admitted, employees leaving the firm 48 M ID-YEAR M EETING | 2024
Performance Fees/Carried Interest - Vesting Vesting at fund level vs. portfolio company level Fund level over life of fund, generally not ratable (7-10 years) Portfolio company level over life of portfolio company investment, generally ratable (3-4 years) Different than vesting of stock compensation in that employees/owners receive 100% of the performance/carried interest granted to them unless they leave the firm i.e. divestiture schedule rather than vesting schedule 49 M ID-YEAR M EETING | 2024
Typical Four-Year Vesting for RSUs and Stock Options Cliff vesting* Vesting* of remaining 75,000 shares at 1/36th per month (2,083 shares) 25,000 shares vested 50,000 shares vested 75,000 shares vested Fully vested 1 year 2 year 3 year 4 year *Unvested shares subject to company right to repurchase at cost 50 M ID-YEAR M EETING | 2024
