The Stock Options Book

The Stock Options Book is intended to give the reader a general overview of how stock options are used in the United States to reward employees for their participation in and commitment to the success of the employer corporation (referred to variously here as the “company” or the “employer”). Stock options are but one of several forms of equity incentives, which may range from restricted stock arrangements to outright gifts of stock. For the sake of keeping this discussion focused, these other forms of equity incentives are covered only briefly here.

Introduction:

There are two basic kinds of stock options: (1) “qualified” or “statutory” stock options, including incentive stock options (ISOs) and employee stock purchase plan (ESPP) options, which are specific creatures of the Internal Revenue Code of 1986 (the “Code”), as amended, and (2) all other stock options, called “nonstatutory” or “nonqualified” stock options (NSOs). This book carefully examines the tax aspects of employee stock options and cites appropriate authority on tax issues. However, the days when the equity compensation professional could feel free to review tax aspects of employee stock options in a vacuum are long past.

Options are subject to a complex web of rules regarding their creation and exercise that are unrelated to the Code, including federal and state securities laws, accounting standards, and country-specific laws governing grants made to employees resident outside of the United States. Therefore, as appropriate, this book gives an overview of how non-tax rules apply and indicates the types of issues raised by the interaction of these rules. Readers should note that the discussion is intended to provide only general planning guidance; where appropriate, we have provided references to authoritative sources on these subjects.

The main body of The Stock Options Book is divided into three parts. Part I provides an overview of stock option plans, employee stock purchase plans, and, briefly, other forms of equity compensation, focusing on the tax aspects; Part II explores technical issues such as accounting (including 2016 amendments to Accounting Standards Codification Topic 718), securities, and tax compliance requirements; Part III looks at current ongoing regulatory issues, including the latest hot topics. Where helpful, illustrative tables are included. At the end of the book, there are supporting materials, including an article by NCEO cofounder Corey Rosen on designing a broad-based plan; primary sources; a glossary; and a bibliography.

As a caveat, it is important to remember that the use of equity incentives is under ever-increasing scrutiny by the Internal Revenue Service (IRS), the accounting profession (as represented by the Financial Accounting Standards Board [FASB]), the Securities and Exchange Commission (SEC), and Congress. When the original form of this text was first published in the early 1990s, stock option planning was a relatively esoteric function of tax and compensation design. Although this book generally describes current areas of ambiguity, the equity compensation professional must be aware that complex issues will continue to arise with respect to individual options and option plans. Each situation should always be reviewed carefully with legal and accounting experts to ensure compliance with the most current rules.

Contents:

• The Basics of Stock Options
• Tax Treatment of Nonstatutory Stock Options
• Tax Treatment of Incentive Stock Options
• Plan Design and Administration
• Employee Stock Purchase Plans
• Trends in Equity Compensation: An Overview
• Financing the Purchase of Stock Options
• Overview of Securities Law Issues
• Tax Law Compliance Issues
• Basic Accounting Issues
• Tax Treatment of Options on Death and Divorce
• Post-Termination Option Issues
• Legislative and Regulatory Initiatives Related to Stock Options: History and Status
• Cases Affecting Equity Compensation
• Transferable Options
• Reloads, Evergreens, Repricings, and Exchanges

The Stock Options Book By Alison Wright, Alisa J. Baker, Pam Chernoff pdf