Stock Options and RS/RSU Ted Denbow VP, Head of Sales

Agenda Equity Compensation types Tax treatments and Planning Opportunities Financial planning examples

Equity Compensation types

Equity Compensation Incentive stock option (ISO) Non-Statutory Options (NSO) Restricted Stock Unit Restricted Stock

Cash flows and Tax Treatment

Restricted Stock Unit (RSU) Event Taxes At Grant N/A At vesting Ordinary income + Social security + Medicare taxes At Liquidation Capital gains Event Date Price Shares Taxes Gant 1/1/2015 $100 100 N/A Vesting 1/1/2016 $120 Income: $12,000* Liquidation 6/1/2017 $300 Long term cap gain: $18,000 Cost basis per share is $100, the price at Grant. Long term gain: ($300-$120)*100 = $18,000 Tax on income includes ordinary income, social security and medicare taxes

Financial planning opportunity Type Planning opportunities RSU Liquidate 1 year after vesting date for Long term cap gain RS NSO ISO

+ Social security+ Medicare taxes Restricted Stock (RS) When receiving RS, client has option to make a 83(b) election within 30 days of Grant. If client elects 83(b), the taxes on RS is the same with RSU. If client does not elect 83(b), the taxes on RS will be different than RSU. Date Taxes w/ 83(b) Taxes w/o 83(b) At Grant Ordinary income + Social security+ Medicare taxes N/A At vesting At Liquidation Capital gains

Restricted Stock (RS) Event Date Price Shares Taxes w/ 83(b) Raising share prices 83(b) is better Event Date Price Shares Taxes w/ 83(b) Taxes w/o 83(b) Grant 1/1/2015 $100 100 Income: $10,000 N/A Vesting 1/1/2016 $150 Income: $15,000 Liquidation 6/1/2017 $300 Long term cap gain: $20,000 Long term cap gain: $15,000 Failing share prices w/o 83(b) is better Event Date Price Shares Taxes w/ 83(b) Taxes w/o 83(b) Grant 1/1/2015 $100 100 Income: $10,000* N/A Vesting 1/1/2016 $50 Income: $5,000* Liquidation 6/1/2017 $25 Long term cap loss: -$7,500 Long term cap loss: -$2,500 W/ 83(b) Cost basis per share is $100, the price at Grant. Cap gain of: ($300-$100)*100 = $20,000 W/o 83(b) Cost basis per share is $150, the price at Grant. Short term gain: ($300-$150)*100 = $15,000 *Taxes on income includes ordinary income, social security and Medicare taxes.

Financial planning opportunity Type Planning opportunities RSU Liquidate 1 year after vesting date for Long term cap gain RS Consider 83(b) election with anticipation of raising share price If client leaves company after 83(b), client loses unvested share and taxes. Liquidate 1 year after grant(w/83b) for long term cap gain Liquidate 1 year after vesting(w/o83b) for long term cap gain NSO ISO

Non-Statutory options (NSO) Date Taxes At Grant N/A At vesting At Exercise Ordinary income + Social security+ Medicare taxes At Liquidation Capital gains Event Date Price Strike Shares Taxes Option Cash flows Grant 1/1/2015 $100 100 N/A $0 Vesting 1/1/2016 $120 Exercise 6/1/2016 $150 Income: $5,000* -$10,000 Liquidation 6/1/2017 $300 Long term cap gain: $15,000 +30,000 Long term gain is preferred Plan for cash flows Cost basis per share is $150, the price at exercise. Cap gain: ($300-$150)*100 = $15,000 Taxes on income includes ordinary income, social security and Medicare taxes.

Financial planning opportunity Type Planning opportunities RSU Liquidate 1 year after vesting date for Long term cap gain RS Consider 83(b) election with anticipation of raising share price If client leaves company after 83(b), client loses unvested share and taxes. Liquidate 1 year after grant(w/83b) for long term cap gain Liquidate 1 year after vesting(w/o83b) for long term cap gain NSO Plan for option exercise (tax bracket) Liquidate 1 year after exercise for Long term cap gain. Plan for cash flows when liquidate 1 yr after exercise. ISO

Incentive Stock Option (ISO) Date Taxes At Grant N/A At vesting At Exercise Potential AMT Adjustment At Liquidation If liquidate within one year of exercise: all ordinary income but not social security Medicare taxes. If liquidate one year after exercise but within two year of grant: partial ordinary income and partial capital gain If liquidate one year after exercise and after two year of grant: qualified disposal –all long term cap gain. No ordinary income Most favorable scenario

Incentive Stock Option (ISO) Event Date Price Strike Shares Taxes Option Cash flows Gant 1/1/2015 $100 100 N/A $0 Vesting 1/1/2016 $120 Exercise 6/1/2016 $150 No ordinary income Possible AMT adj -$10,000 Liquidation 6/1/2017 $300 Long term cap gain: $15,000 +30,000 Long term gain is preferred Plan for cash flows

Financial planning opportunity Type Planning opportunities RSU Liquidate 1 year after grant date for Long term cap gain RS Consider 83(b) election with anticipation of raising share price If client leaves company after 83(b), client loses unvested share and taxes. Liquidate 1 year after grant(w/83b) for long term cap gain Liquidate 1 year after vesting(w/o83b) for long term cap gain NSO Plan for option exercise (tax bracket) Liquidate 1 year after exercise for Long term cap gain. Plan for cash flows. ISO Plan for qualified disposal.

Summary

Summary of Equity Compensation Date RSU RS w/83b RS w/o 83b NSO ISO At Grant Income At vesting At Exercise Possible AMT Adjustment At Liquidation Capital gain (for qualified disposal) Planning Opportunity Manage liquidation to Long term cap gain 83(b) decision Manage to Long term cap gain. Plan for cash flows Manage to qualified disposal.

Hypothetical examples #1 - $3mm more ending asset w/ lower taxes All options liquidate upon exercise – all short term cap gains All options liquidate one year after exercise – all long term cap gains 47 year old couple, with 100,000 shares of ISO. Current pricing is $100 and strike price is $100 10 year vesting schedule

Hypothetical example #2 – lower probability due to cash strains All options liquidate upon exercise – all short term cap gains. All options liquidate one year after exercise – all long term cap gains. However, cash strains negatively impacts the probability of success in this extreme example. 47 year old couple, with 100,000 shares of ISO. Current pricing is $100 and strike price is $100. 10 year vesting schedule. This couple has less initial assets than example #1.

Take Aways Equity compensation planning represents a great opportunity to deliver more value to clients and prospects Understanding the type of compensation is an important first step. Cash flows and tax considerations are critical components of planning RightCapital launched a Stock plan module that helps advisors plan efficiently.