How Do I Implement Incentive Stock Options?


For many Silicon Valley companies, incentive stock options are an important investment strategy for maintaining long-term relationships with employees. It is important to find the investment strategy which is right for your business. The experienced Silicon Valley corporate attorneys at Structure Law Group will help your business identify its employment and investment needs, and access the tools which most efficiently meet these needs.

What Are Your Goals?

The first step in implementing incentive stock options is to consider the specific goals you wish to meet by use of such options. Do you hope to retain employees who might be considering employment elsewhere? Are there specific sales or design goals you need to meet? By identifying the specific problem, employers can determine whether incentive stock options are the appropriate tool to meet their goals.

It is also important to carefully consider both the pros and cons of incentive stock options. Investors and financing companies may be unwilling to commit to this additional financial obligation. Stock options can also carry tax liability for the employer or employee. Finally, without careful planning, stock options can be used to reclassify independent contractors as employees. This is because incentive stock options are only available to employees. This and other legal consequences can result from incentive stock options which are not properly executed under the right circumstances.

Changes for Incentive Compensation

The new tax bill, which was signed into law in December 2017, makes changes to incentive compensation. Lexology reports that the Internal Revenue Code caps a public company’s federal income tax deduction per employee at $1 million in any taxable year. Prior to the new tax law, this cap was subject to exceptions for commissions and performance-based compensation. This exception has been eliminated, and companies will enjoy greater flexibility in designing their incentive compensation arrangements. Performance metrics are no longer approved by shareholders. Companies may also raise or lower performance compensation for executives (whereas the old rules only allowed a company to lower compensation). They may adjust incentive compensation due to extraordinary events affecting the company’s financials. They may also grant equity and cash incentive compensation without being subject to the annual individual limits in equity and cash incentive plans. Finally, stock options and stock appreciation rights will no longer be favored under Section 162(m), and this allows businesses greater financial flexibility in designing incentive compensation packages.

Many changes to United States tax law took effect in 2017, and these changes have significant consequences for business owners. Tax liability, SEC compliance, state and federal regulations, and many other considerations can be affected by changes to incentive performance pay structures. Business owners should seek the advice of an experienced corporate attorney in order to fully explore the legal consequences of any proposed changes to their incentive pay programs.

Experienced Legal Advice to Help Your Business Invest in Employees

The skilled corporate attorneys at Structure Law Group have extensive experience in helping companies access the best strategies for investing in their employees. Call (408) 441-7500 today, or email to schedule your consultation with an experienced Silicon Valley corporate attorney. We will help protect your business during all types of expansion and investment.