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Tuesday, March 6, 2012
Stock Options - Succession Planning
Successful succession planning sometimes involves the use of stock options. Stock options are used to give employees incentive to put render exceptional service and put forth their best effort to grow and increase the value of the corporation. If the employee works hard and the corporation increases in value the employee’s stock increases in value.
Stock options can also be used to create a market for the stock of the founding shareholder. When stock options are awarded to and exercised by key employees, a market is created for eventual sale of the founding shareholder’s stock.
Stock options can be qualified or non-qualified. Qualified options have to granted with an option price equal to fair market value. Non-qualified options may have an option price less than fair market value. Qualified and non-qualified options are treated differently for federal income tax purposes. More about taxation of stock options will be in a future blog.
Options generally are awarded for a 5 year term. The employee can exercise the option any time during the term. Upon exercise of the option, the employee pays the option price to the corporation. Some corporations set a below market option price for non-qualified stock options to make it easy for employees to exercise the option. Other corporations require employees to pay a fair market value option price so they really have “skin in the game.” Other corporations pay a bonus to the employee at the time of option exercise so as to partially fund the employee’s payment of the option price. The right answer here depends on the situation.
When you issue stock options to your key employees, it is important that the award agreement contain non-competition provisions, transfer restrictions and buy/sell provisions. If you and a key employee who exercised a stock option have a dispute in the future, you want to make sure you have a way to get the stock back when his employment e is terminated.
Will talk more about taxation of stock options in future blogs. Please give me a call if you want to discuss any questions about qualified or non-qualified stock options. Jsenney@pselaw.com or 937-223-1130.
AND ONE MORE THING. The stock market seems to have turned itself around. Now might be a good time to consider making gifts of appreciated stock or other assets to the next generation. Many assets are still being traded or valued at relatively low prices. If these assets are expected to increase in value over time, now might be the right time to gift such assets. You can take a business valuation discount on a transfer of closely-held stock. Give me a call or email at Jsenney@pselaw.com or 937-223-1130 if you want to talk about gifting stock to family as part of your succession planning. Jsenney@pselaw.com or 937-223-1130.
Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423
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