1. Stock Options and RS/RSU
Ted Denbow
VP, Head of Sales

2. Agenda Equity Compensation types
Tax treatments and Planning Opportunities
Financial planning examples

3. Equity Compensation types

4. Equity Compensation Incentive stock option (ISO)
Non-Statutory Options (NSO)
Restricted Stock Unit
Restricted Stock

5. Cash flows and Tax Treatment

6. Restricted Stock Unit (RSU)
Event
Taxes
At Grant
N/A
At vesting
Ordinary income
+ Social security + Medicare taxes
At Liquidation
Capital gains
Event
Date
Price
Shares
Taxes
Gant
1/1/2015
$100
100
N/A
Vesting
1/1/2016
$120
Income: $12,000*
Liquidation
6/1/2017
$300
Long term cap gain: $18,000
Cost basis per share is $100, the price at Grant.
Long term gain: ($300-$120)*100 = $18,000
Tax on income includes ordinary income, social security and medicare taxes

7. Financial planning opportunity
Type
Planning opportunities
RSU
Liquidate 1 year after vesting date for Long term cap gain RS
NSO
ISO

8. + Social security+ Medicare taxes
Restricted Stock (RS)
When receiving RS, client has option to make a 83(b) election within 30 days of Grant.
If client elects 83(b), the taxes on RS is the same with RSU.
If client does not elect 83(b), the taxes on RS will be different than RSU.
Date
Taxes w/ 83(b)
Taxes w/o 83(b)
At Grant
Ordinary income
+ Social security+ Medicare taxes
N/A
At vesting
At Liquidation
Capital gains

9. Restricted Stock (RS) Event Date Price Shares Taxes w/ 83(b)
Raising share prices
83(b) is better
Event
Date
Price
Shares
Taxes w/ 83(b)
Taxes w/o 83(b)
Grant
1/1/2015
$100
100
Income: $10,000
N/A
Vesting
1/1/2016
$150
Income: $15,000
Liquidation
6/1/2017
$300
Long term cap gain: $20,000
Long term cap gain: $15,000
Failing share prices
w/o 83(b) is better
Event
Date
Price
Shares
Taxes w/ 83(b)
Taxes w/o 83(b)
Grant
1/1/2015
$100
100
Income: $10,000*
N/A
Vesting
1/1/2016
$50
Income: $5,000*
Liquidation
6/1/2017
$25
Long term cap loss: -$7,500
Long term cap loss: -$2,500
W/ 83(b)
Cost basis per share is $100, the price at Grant.
Cap gain of: ($300-$100)*100 = $20,000
W/o 83(b)
Cost basis per share is $150, the price at Grant.
Short term gain: ($300-$150)*100 = $15,000
*Taxes on income includes ordinary income, social security and Medicare taxes.

10. Financial planning opportunity
Type
Planning opportunities
RSU
Liquidate 1 year after vesting date for Long term cap gain RS
Consider 83(b) election with anticipation of raising share price
If client leaves company after 83(b), client loses unvested share and taxes.
Liquidate 1 year after grant(w/83b) for long term cap gain
Liquidate 1 year after vesting(w/o83b) for long term cap gain
NSO
ISO

11. Non-Statutory options (NSO)
Date
Taxes
At Grant
N/A
At vesting
At Exercise
Ordinary income
+ Social security+ Medicare taxes
At Liquidation
Capital gains
Event
Date
Price
Strike
Shares
Taxes
Option Cash flows
Grant
1/1/2015
$100
100
N/A $0
Vesting
1/1/2016
$120
Exercise
6/1/2016
$150
Income: $5,000*
-$10,000
Liquidation
6/1/2017
$300
Long term cap gain: $15,000
+30,000
Long term gain is preferred
Plan for cash flows
Cost basis per share is $150, the price at exercise.
Cap gain: ($300-$150)*100 = $15,000
Taxes on income includes ordinary income, social security and Medicare taxes.

12. Financial planning opportunity
Type
Planning opportunities
RSU
Liquidate 1 year after vesting date for Long term cap gain RS
Consider 83(b) election with anticipation of raising share price
If client leaves company after 83(b), client loses unvested share and taxes.
Liquidate 1 year after grant(w/83b) for long term cap gain
Liquidate 1 year after vesting(w/o83b) for long term cap gain
NSO
Plan for option exercise (tax bracket)
Liquidate 1 year after exercise for Long term cap gain. Plan for cash flows when liquidate 1 yr after exercise.
ISO

13. Incentive Stock Option (ISO)
Date
Taxes
At Grant
N/A
At vesting
At Exercise
Potential AMT Adjustment
At Liquidation
If liquidate within one year of exercise: all ordinary income but not social security Medicare taxes.
If liquidate one year after exercise but within two year of grant: partial ordinary income and partial capital gain
If liquidate one year after exercise and after two year of grant: qualified disposal –all long term cap gain. No ordinary income
Most favorable scenario

14. Incentive Stock Option (ISO)
Event
Date
Price
Strike
Shares
Taxes
Option Cash flows
Gant
1/1/2015
$100
100
N/A $0
Vesting
1/1/2016
$120
Exercise
6/1/2016
$150
No ordinary income
Possible AMT adj
-$10,000
Liquidation
6/1/2017
$300
Long term cap gain: $15,000
+30,000
Long term gain is preferred
Plan for cash flows

15. Financial planning opportunity
Type
Planning opportunities
RSU
Liquidate 1 year after grant date for Long term cap gain RS
Consider 83(b) election with anticipation of raising share price
If client leaves company after 83(b), client loses unvested share and taxes.
Liquidate 1 year after grant(w/83b) for long term cap gain
Liquidate 1 year after vesting(w/o83b) for long term cap gain
NSO
Plan for option exercise (tax bracket)
Liquidate 1 year after exercise for Long term cap gain.
Plan for cash flows.
ISO
Plan for qualified disposal.

16. Summary

17. Summary of Equity Compensation
Date
RSU
RS w/83b
RS w/o 83b
NSO
ISO
At Grant
Income
At vesting
At Exercise
Possible AMT Adjustment
At Liquidation
Capital gain
(for qualified disposal)
Planning Opportunity
Manage liquidation to Long term cap gain
83(b) decision
Manage to Long term cap gain.
Plan for cash flows
Manage to qualified disposal.

18. Hypothetical examples #1 - $3mm more ending asset w/ lower taxes
All options liquidate upon exercise – all short term cap gains
All options liquidate one year after exercise – all long term cap gains
47 year old couple, with 100,000 shares of ISO.
Current pricing is $100 and strike price is $100
10 year vesting schedule

19. Hypothetical example #2 – lower probability due to cash strains
All options liquidate upon exercise – all short term cap gains.
All options liquidate one year after exercise – all long term cap gains.
However, cash strains negatively impacts the probability of success in this extreme example.
47 year old couple, with 100,000 shares of ISO. Current pricing is $100 and strike price is $ year vesting schedule.
This couple has less initial assets than example #1.

20. Take Aways
Equity compensation planning represents a great opportunity to deliver more value to clients and prospects
Understanding the type of compensation is an important first step.
Cash flows and tax considerations are critical components of planning
RightCapital launched a Stock plan module that helps advisors plan efficiently.