Board Questions to ask about Stock Options, NSOs, ISOs, Restricted Stock, Restricted Stock Units (RSUs).

[Earlier I wrote about the different vehicles]

You’re sitting on a board and the CEO presents some proposed grants. Motion to approve – second – all in favor – ay. Here’s what you should have asked before the board meeting.

A. Economics

  1. What’s the vesting schedule?
  2. What are these options worth right now?
  3. What do we think they are worth in 4 years (85% confidence level, please)?
  4. How does that compare with other employees at the same level? What’s the gender and race distribution?
  5. How does that compare with other employees above and below in the hierarchy? What’s the gender and race distribution?
  6. Per department and per level: what is the percentage of vested and unvested stock/option?
  7. Are there key employees that require a refresh?

B. Governance

  1. Who is authorized to make the grant under corporate law, the plan document, and any equity grant policy?
  2. Did you check limits with both the plan document and the equity award policy, (=do you have enough options or shares)?
  3. If a share pool increase is needed, are there sufficient authorized shares in the charter? Have you obtained both board AND stockholder approval?
  4. Have you checked if all grants to an individual during the year is exceeding any aggregate limits?
  5. No back-dating!
  6. Public Companies: No equity before material non-public information.
  7. No granting before employee start-date! But you can award options before the hire date and make them effective after the hire date.
  8. What happens in the event of a change in control of the company?
  9. ISOs: Yes, more employee-friendly, but not tax-deductible like NSO when income is recognized by employee – why are we doing it?
  10. ISOs: Are any ISO grants being made to 10%+ stockholders? Have you considered family relationships?
  11. ISOs: Are you under the $100,000 limit? Any excess is treated as NSOs. Generally, it’s easy to disqualify if not properly tracked.
  12. ISOs, NSOs: What is the exercise period of options? Is it longer than 90 days?
  13. ISOs: If the exercise period is longer than 90 days, have employees been advised to seek advice on the effects on their ISOs, converting into NSOs?
  14. NSOs and Restricted Stock: Is the startup permitting early exercise? Who is shouldering the tax burden? Will employees have ample information to make that decision? Is there a problem with confidential information that would need to be shared to make that decision?
  15. NSOs and Restricted Stock: Have you been advising employees about filing or not filing a 83(b) election (DON’T DO THAT!)? Have employees been filing 83(b) elections? Have all these forms been collected?
  16. Restricted Stock: Is the employee electing to defer issuance (=stock became vested, but deferral of settlement) for a year?
  17. Restricted Stock: If you’re a public company and your stock is thinly traded, then executive awards four times a year could move your stock price!
  18. Restricted Stock: Avoid giving employees choices. For example, a senior executive member might want to avoid withholding shares and rather pay cash because they know the stock price is going to jump next week after the earnings call and they want to hold more shares.
  19. Restricted Stock: Remember that accounting values drive disclosures in the summary compensation table. A $1 million award could become $2 million on paper because of accounting model. Restricted Stock can change your income statement!
  20. Restricted Stock Units (RSUs): What causes the RSUs to become vested — time, personal performance, company milestones? What happens in case of termination, retirement, death?

C. Taxes and Withholdings

  1. Have taxation and W-2 withholdings of the different vehicles been considered and explained to employees? Specifically, has the cost to the company been considered?
  2. Restricted Stock, Restricted Stock Units: Is there an agreement to purchase back shares to help the employee pay for taxes (sometimes called a “cashless distribution”, or a “sell to cover”)? Where will the share price be when RSUs are vesting? You will have to file Form Sec 4, which might trigger analyst inquiries if you’re in the middle of filings.
  3. Does the company plan to offer or support loans to exercise  stock options, or to support taxation? Many employees are surprised that they end up with a higher tax burden, despite income withholdings by the company.
  4. Have you considered the filing fees?

Thoughts? Opinions? Comments? Corrections?