Though privately held companies cannot offer stock for sale to the general public, they can offer stock and stock options to owners, executives, and key employees. Doing so can incentivize critical personnel to perform at high levels and stay with the organization. That said, it is important to be sure that your company structures these incentive options effectively. An experienced business lawyer can help you protect your corporate interests while also providing incentives to your personnel.
In today’s current employment market, most executives have a compensation package that consists of stock or stock options, at least in part. This gives executives an incentive to make the company profitable and produce the best possible results throughout their employment.
In the past, stock and stock options were reserved for the highest levels of management. Now, stock is used as compensation to a wider range of employees. Offering stock as part of a compensation package helps to create an incentive for productivity at all levels of a company’s workforce. Using stock in lieu of hiring bonuses or salary also helps to reduce the capital a business must invest in hiring incentives and improves cash flow by reducing the amount that is spent on payroll.
Stock options are an effective way to get the best possible performance out of a company’s executives and other key employees. A stock option allows the recipient to either buy stock in the company at a set price or sell stock in the company at a set price. Because the employee has the option to either buy company stock at a low price or sell it at a high price, this gives the employee incentive to make the business as profitable as possible. When stock options are contingent on an employee remaining with the company, they can also discourage employee turnover among critical personnel.
Incentive stock options (ISOs) are a specific type of stock options that are available only to employees. They are a common form of executive compensation in public companies, where most private startup companies use them as a form of equity compensation for employees who sign on early with the company. ISOs have a specific tax benefit to the recipient: the taxpayer pays neither income tax nor employment tax on the difference between the exercise price and the strike price (the price the employee must pay to purchase one share of the stock).
Non-qualified stock options (NSOs) have less favorable tax treatment than ISOs. The difference between the exercise price and fair market value is subject to both ordinary income tax and payroll taxes (such as Medicare and FICA). Because NSOs are not qualified for special tax treatment, they are more flexible than ISOs. For example, ISOs cannot be extended longer than 90 days past the end of your employment with the company that granted the option. NSO tax is withheld at the time the option is exercised, where ISO taxes are paid when the employee files his or her tax return the following April.
The Right California Business Attorneys for Your Company’s Stock Options
There are many ways to effectively use employee stock options, but it is important to protect your company’s interests in the process. The experienced stock option attorneys at Structure Law Group can help you meet your goals and protect your legal interests when creating stock options. Call (408) 441-7500 or visit our website to schedule a consultation.