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    Equity Option Plan Comparison

     

    Non-Qualified Stock Options

    Incentive Stock Options

    Restricted Stock Plan

    Phantom Stock Plan

    Description

     

    Employees are granted options to purchase common stock, exercisable at some time in the future. Option price may be discounted.

    Employees are granted options to purchase common stock, exercisable at some time in the future.

    Company stock is granted to employee, subject to forfeiture, unless vesting conditions are satisfied.

    A plan that grants units of phantom stock, which are valued based on the company's common stock.

    Type Of Interest

    Conveys right to purchase ownership interest in company.

    Conveys right to purchase ownership interest in company.

    Conveys ownership interest in company.

    Conveys percentage of value of the company.

    No incidences of ownership.

    May include stock conversion feature.

    Limit On Grant Amount

    No

    Yes

    No employee may accrue more than $100,000 worth of options per year (valued at date of grant).

     

    No

    No

    Minimum Purchase Price

    No

    Yes

    Not less than the fair market value of the stock at the date the option is granted.

    No

    N/A

    Distributions Payable In

    Stock

    Stock

    Stock

    Cash or stock

    Who Is Eligible To Participate?

    All or some employees.

    All or some employees.

    All or some employees.

    All or some employees.

    Out Of Pocket Cost To Employee?

     

    Employee must pay for shares purchased at the stated exercise price.

    Employee must pay for shares purchased at the stated exercise price.

    No

    No

    When Is Employee Taxed?

     

    NSOs are taxed on the "spread" at the time of exercise and on final disposition.

     

    ISOs are not taxed on exercise; but are taxed at the time of sale of shares (if holding periods met).

     

    At time stock vests (i.e., when it is no longer forfeitable), or when it becomes transferable.

    But if employee makes an IRC 83(b) election, the time of taxation is accelerated to the year of grant.

    At time of payment.

    What Amount Is Taxable Income To Employee?

     

    The difference ("spread") between the fair market value of the stock at the date of exercise and the exercise price.

     

    The difference between the sale price of the stock when sold and the exercise price paid by employee to acquire the stock.

     

    The fair market value of the stock at the time it becomes vested or restrictions on transfer lapse.

    If cash, the value of the cash benefit paid to employee.

    If stock, the difference between the fair market value of the stock at the time it becomes vested or restrictions on transfer lapse and the amount paid for the stock by employee.

    Tax Treatment

    Ordinary income on the spread on exercise.

    Capital gain on appreciation at disposition.

    Capital gain on appreciation at disposition.

    Treated as ordinary income to employee.

    But if employee makes an IRC 83(b) election, ordinary income on the FMV of the stock over amount paid.

    Capital gain on appreciation at sale by employee.

    Treated as ordinary income to employee.

    Holding Period For Favorable Tax Treatment

    None

    2 years from grant date and one year from exercise.

     

    N/A

    N/A

    Vesting

    May condition right to exercise on acquisition, completion of stated number of years of service, on stock value reaching certain level or other performance goals (5 years for state law).

    May condition right to exercise on acquisition, completion of stated number of years of service, on stock value reaching certain level or other performance goals (5 years for state law).

    May condition right to exercise on acquisition, completion of stated number of years of service, on stock value reaching certain level or other performance goals.

    May condition right to exercise on acquisition, completion of stated number of years of service, on stock value reaching certain level or other performance goals.

    Payment Triggers

    N/A

    N/A

    N/A

    Prior to or at termination/ retirement.

    Death

    Acquisition

    Maximum Period For Exercise

    No maximum period.

    10 years maximum exercise period.

    N/A

    N/A

    Can Employee Exercise Before Date Of Acquisition/ Merger?

     

    Permissible to limit options so that employee may only exercise in the event of acquisition/ merger.

    Permissible to limit options so that employee may only exercise in the event of acquisition/merger (subject to maximum ten year exercise period).

    N/A

    N/A

    Accounting Considerations

     

    Charge to earnings if price is below fair market value.

    Will decrease earnings per share due to dilution.

    No charge to earnings since price equals fair market value.

    Will decrease earnings per share due to dilution.

    May require employer to recognize compensation expense equal to the fair market value of the stock at the date of grant, less any amount paid by the employee, amortized over the vesting period.

    Company must recognize a compensation expense as employee's interest in the award increases.

    Is The Stock Or Stock Option Transferable By The Employee?

    Option may not be transferable; stock is generally transferable after exercise, but can be subject to restrictions on transfer.

    Options may not be transferable; stock must be held for required period to avoid taxable event for employee.

    Stock is subject to forfeiture and restrictions on transfer.

    N/A

    When Can The Company Take Deduction?

    Delayed deduction.

    Can deduct amount of income recognized by employee at the time the employee recognizes income (i.e., year of exercise).

     

    No deduction.

    Delayed deduction.

    Can deduct amount of income recognized by employee at the time the employee recognizes income (i.e., year stock vests or restriction on transfer lapse)

    But if employee makes an IRC 83(b) election, the time of deduction is accelerated (i.e., year of grant).

    Delayed deduction.

    Can deduct amount of income recognized by employee at the time employee recognizes income (i.e., year payment is made).