STOCK OPTIONS CAN BE A GREAT WAY TO RECRUIT AND RETAIN EMPLOYEES OF START-UP AND EARLY-STAGE BUSINESSES. IT CAN ALSO BE AN EFFECTIVE MOTIVATIONAL TOOL.
BUT BEFORE YOU START “SHARING THE WEALTH” OR THE POTENTIAL WEALTH, REMEMBER THERE ARE A NUMBER OF RULES, REGULATIONS AND LAWS THAT MUST BE FOLLOWED.
EQUITY COMPENSATION MISTAKES CAN BE COSTLY. SO HERE ARE SOME TIPS:
[FS- TIPS]
1) IF YOU HAVE A CORPORATION, YOU NEED THE BOARD OF DIRECTORS TO APPROVE ALL STOCK OPTION OR EQUITY INCENTIVE PLANS. IDEALLY, YOU WANT YOUR SHAREHOLDERS TO DO THE SAME.
2) YOU MUST COMPLY WITH ALL ASPECTS OF FEDERAL RULE 701 AS WELL AS A NUMBER OF OTHER FEDERAL AND STATE RULES AND REGULATIONS, AND THEIR COMPLEXITY IS NOT FOR THE FAINT OF HEART.
FIRST- YOU NEED TO IDENTIFY THE SECURITIES LAW EXEMPTION FOR ISSUING STOCK OPTIONS.
YOU MUST ALSO UNDERSTAND THE MATHEMATICAL LIMITATIONS ON HOW MUCH EQUITY YOU CAN SHARE, EVEN WHEN RE-PRICING YOUR COMPANY’S OPTIONS.
ALSO, BE AWARE THAT YOU CAN NOT GRANT STOCK OPTIONS TO AN ENTITY LIKE AN LLC., ONLY TO A PERSON.
REMEMBER, FEDERAL AND STATE LAWS *BOTH*APPLY WHEN GRANTING STOCK OPTIONS. SO IF YOU’RE COMPANY IS IN D-C AND YOUR WORKERS ARE RESIDENTS OF CALIFORNIA. YOU NEED TO DO YOUR HOMEWORK IN BOTH STATES.
IN SOME STATE’S YOU NEED TO FILE A FORM AND PAY A FEE BEFORE GRANTING STOCK OPTIONS. IT SEEMS TRIVIAL, BUT JUST DO IT AND AVOID A HEADACHE LATE ON.
MAKE SURE YOU WITHHOLD INCOME AND EMPLOYMENT TAXES ON THE EXERCISE OF NON-QUALIFIED STOCK OPTIONS.
IF THERE IS A SPREAD YOU NEED TO WITHHOLD ON THAT TOO- EVEN IF THE EMPLOYEE HAS LEFT THE COMPANY.
DON’T FORGET TO REPORT ISO EXERCISES. *YOU* MAY MISS THIS STEP. THE *IRS* PROBABLY WON’T .
FINALLY, AVOID ADMINISTRATIVE AND CLERICAL ERRORS. IT’S CHEAPER TO DO IT RIGHT THE FIRST TIME THAN PAY TO HAVE THE PROBLEM CORRECTED.
IF YOU’RE CONSIDERING OFFERING STOCK OPTIONS, DON’T GO IT ALONE. CALL PAUL J. BURKHART AT 561 880- 0155 OR LOG ONTO PAULBERKART.NET.