Copyright Net Worth Strategies, Inc Making Timely & Informed Equity Compensation Decisions An Employee Workshop from: Net Worth Strategies, Inc.

Copyright Net Worth Strategies, Inc Workshop Objectives Provide unique insights regarding one’s company stock and option holdings Provide unique insights regarding one’s company stock and option holdings Facilitate timely diversification decisions to maximize the value of your grants Facilitate timely diversification decisions to maximize the value of your grants Introduce a new platform for equity compensation recipient communication & decision support Introduce a new platform for equity compensation recipient communication & decision support

Copyright Net Worth Strategies, Inc. 2011Background Net Worth Strategies, Inc.: Net Worth Strategies, Inc.: The leading provider of equity compensation education, communication & decision support solutions The leading provider of equity compensation education, communication & decision support solutions Program Components: Program Components: Workshop Presentation Workshop Presentation Equity Compensation Benefit Statement Equity Compensation Benefit Statement Access to Access to

Copyright Net Worth Strategies, Inc. 2011Agenda Myths and Truths about Equity Comp. Myths and Truths about Equity Comp. Overview of StockOpter ® : Equity Compensation Benefit Statement Overview of StockOpter ® : Equity Compensation Benefit Statement Equity Compensation Concepts & Taxation Equity Compensation Concepts & Taxation StockOpter Analysis Output StockOpter Analysis Output Resources and Tools Resources and Tools

Copyright Net Worth Strategies, Inc Equity Compensation Misconceptions & Truths

Copyright Net Worth Strategies, Inc Common Misconceptions Getting assistance or creating an equity comp. strategy is unnecessary Getting assistance or creating an equity comp. strategy is unnecessary One should exercise / sell when: One should exercise / sell when: Options expire or employment is terminated Options expire or employment is terminated Money is needed Money is needed Stock price target is met Stock price target is met Taxation can be avoided Taxation can be avoided I’m now getting Restricted Stock Grants so managing my Stock Options is unnecessary I’m now getting Restricted Stock Grants so managing my Stock Options is unnecessary

Equity Comp. Truths Careful planning and professional assistance facilitates better decisions & reduces costly mistakes Careful planning and professional assistance facilitates better decisions & reduces costly mistakes Exercise / sell decisions should be based on: Exercise / sell decisions should be based on: Remaining time value / leverage not stock price alone Remaining time value / leverage not stock price alone Financial goals not just cash flow requirements Financial goals not just cash flow requirements Level of concentration in company stock and options Level of concentration in company stock and options Taxes are unavoidable but they can be managed Taxes are unavoidable but they can be managed Outstanding Stock Option Grants still require timely action Outstanding Stock Option Grants still require timely action

Copyright Net Worth Strategies, Inc StockOpter ® Equity Compensation Benefit Statement

Copyright Net Worth Strategies, Inc Equity Comp Benefit Stmt.* Grant Summary & Key Findings Grant Summary & Key Findings Stock Option Valuation Stock Option Valuation In-the-Money Value Table In-the-Money Value Table Time / Black Scholes Value Table Time / Black Scholes Value Table Restricted Share Value Table Restricted Share Value Table Forfeit Value Calculations Forfeit Value Calculations Leverage Table Leverage Table Insight Ratios Table (Stock Options) Insight Ratios Table (Stock Options) All Reported Dollar Amounts are Pre-Tax

Copyright Net Worth Strategies, Inc Equity Compensation Concepts

Copyright Net Worth Strategies, Inc What are Stock Options? Definition: Definition: A grant of the right to purchase company stock in the future at a fixed (grant) price A grant of the right to purchase company stock in the future at a fixed (grant) price Grant Price: (aka – exercise, strike or option price) Grant Price: (aka – exercise, strike or option price) It is the price at which an employee can exercise the stock option, once vested It is the price at which an employee can exercise the stock option, once vested Vesting Date: Vesting Date: The date when a traunch of options can be exercised The date when a traunch of options can be exercised

Copyright Net Worth Strategies, Inc Stock Option Definitions Bargain Element: (aka: Spread) Bargain Element: (aka: Spread) The difference between the option exercise price & the market price of the stock at exercise The difference between the option exercise price & the market price of the stock at exercise Exercise: Exercise: The process of purchasing the option shares at the grant price The process of purchasing the option shares at the grant price Selling: Selling: Selling the purchased shares stock of an exercised option (the option itself is not sold) Selling the purchased shares stock of an exercised option (the option itself is not sold)

Copyright Net Worth Strategies, Inc Restricted Stock Definitions Restricted Stock Award = RSA Restricted Stock Award = RSA A Grant of employer stock at no cost or substantial discount that is subject to restrictions A Grant of employer stock at no cost or substantial discount that is subject to restrictions AKA: Restricted Stock Unit = RSU AKA: Restricted Stock Unit = RSU Types of Restrictions Types of Restrictions Time Vesting (i.e. Future Date) Time Vesting (i.e. Future Date) Performance Vesting (i.e. Revenue Target) Performance Vesting (i.e. Revenue Target)

Copyright Net Worth Strategies, Inc Stock Option Valuation In-the-Money Value (ITMV): In-the-Money Value (ITMV): Fair Market Value (FMV) – Grant Price x Shares Fair Market Value (FMV) – Grant Price x Shares Option Value (aka: Full or Black-Scholes Value [BSV]) : Option Value (aka: Full or Black-Scholes Value [BSV]) : Made up of two components: Made up of two components: In-the-Money Value + Time Value (TV) In-the-Money Value + Time Value (TV) Time Value is estimated using methodologies including the Black-Scholes formula Time Value is estimated using methodologies including the Black-Scholes formula BSV = TV + ITMV BSV = TV + ITMV

Copyright Net Worth Strategies, Inc Time Value Illustration Strike Price Option Price Expiry Jan Expiry Jan Last Trade As of 9/9/09 Last Trade As of 9/9/ In the Money Under Water General Mill (GIS) Market Traded Options as of Sept 9, 2009

Copyright Net Worth Strategies, Inc Option Valuation Methods Practical Applications: Practical Applications: Valuing Market Traded Options Valuing Market Traded Options Expensing Stock Options on Financial Statements Expensing Stock Options on Financial Statements Valuing Employee Stock Options for decision support Valuing Employee Stock Options for decision support Black-Scholes is the most broadly used and practical model for valuing employee stock options for decision support because the assumptions used are less complicated than alternatives Black-Scholes is the most broadly used and practical model for valuing employee stock options for decision support because the assumptions used are less complicated than alternatives The Binomial model is an alternative to Black- Scholes that financial experts believe can produce lower values for expensing purposes because it uses changes in volatility and option-forfeiture rates The Binomial model is an alternative to Black- Scholes that financial experts believe can produce lower values for expensing purposes because it uses changes in volatility and option-forfeiture rates

Copyright Net Worth Strategies, Inc Estimating Time Value The Black Scholes formula calculates the Time Value of a stock option using the following factors: The Black Scholes formula calculates the Time Value of a stock option using the following factors: 1. Time until expiration 2. Volatility of the stock price 3. The In-the-money value / Leverage 4. Risk free rate of return (RFR) 5. Per share dividend

Copyright Net Worth Strategies, Inc Time Until Expiration Total Option Value Years Time Value Element Spread Time Value decreases as the expiration date approaches.

Copyright Net Worth Strategies, Inc Stock Price Volatility The annualized standard deviation of the stock's changes in price The annualized standard deviation of the stock's changes in price Expressed as a percentage (i.e. std dev of 0.3 is volatility of 30%) Expressed as a percentage (i.e. std dev of 0.3 is volatility of 30%) Statistical method to provide range of possible stock prices over option life Statistical method to provide range of possible stock prices over option life Types of Volatility: Types of Volatility: Historical: the actual volatility that occurred to the underlying stock during some look back time period Historical: the actual volatility that occurred to the underlying stock during some look back time period Implied: the market's estimate of future volatility derived from the option's bid/ask mid price Implied: the market's estimate of future volatility derived from the option's bid/ask mid price

Copyright Net Worth Strategies, Inc GIS Volatility 12 Month Price Volatility of GIS Stock A volatile stock has a higher upside potential over time. The greater the volatility, the higher the Time Value.

Copyright Net Worth Strategies, Inc Volatility Selection Depends on application: Depends on application: Valuing Employee Stock Options for decision support Valuing Employee Stock Options for decision support Expensing Stock Options on Financial Statements Expensing Stock Options on Financial Statements Analyzing Market Traded Options Analyzing Market Traded Options Consequently, selection is “art” not science Consequently, selection is “art” not science Compare a variety of sources to validate: Compare a variety of sources to validate: Company Annual Report (SEC Filings) Company Annual Report (SEC Filings) Market Traded Options: Market Traded Options: Peer Comparisons (use for private companies) Peer Comparisons (use for private companies)

Copyright Net Worth Strategies, Inc In-the-Money Value As the ITM value increases, TV decreases because upside leverage is less.

Copyright Net Worth Strategies, Inc Stock Option Leverage High Leverage/TV: stock price is close to the option price... Low Leverage/TV: option has significant ITM value... The higher the current stock price is relative to the strike price, the less time value or upside leverage remains in the option.

Copyright Net Worth Strategies, Inc Risk Free Rate of Return An option provides the holder with the right to own stock at a certain price without having to purchase the stock… An option provides the holder with the right to own stock at a certain price without having to purchase the stock… Consequently, an option’s value is enhanced by the ability to use the capital that would otherwise be invested in the stock for some other investment… Consequently, an option’s value is enhanced by the ability to use the capital that would otherwise be invested in the stock for some other investment… The Risk Free Rate represents the return on this other investment which enhances the value of the stock option The Risk Free Rate represents the return on this other investment which enhances the value of the stock option The higher the risk-free rate of return, the higher the BSV and TV of the option.

Copyright Net Worth Strategies, Inc The Risk Free Rate Affect For option valuation purposes: For option valuation purposes: The Risk Free Rate can be derived from the yield on US Treasury bills or from similar investments The Risk Free Rate can be derived from the yield on US Treasury bills or from similar investments This value can also be found in the company’s annual report for the purpose of option expensing This value can also be found in the company’s annual report for the purpose of option expensing The higher the Risk Free Rate of Return, the higher the Time Value of the option.

Copyright Net Worth Strategies, Inc Per Share Dividend Decrease an option’s Time Value because the holder is forgoing the dividend until the time of exercise Decrease an option’s Time Value because the holder is forgoing the dividend until the time of exercise A dividend can produce negative Time Value depending on the other BSV factors A dividend can produce negative Time Value depending on the other BSV factors The inclusion of a dividend is not relevant if you intend to exercise and sell immediately for diversification purposes The inclusion of a dividend is not relevant if you intend to exercise and sell immediately for diversification purposes The Time Value of an option is lower when the dividend is factored in.

Copyright Net Worth Strategies, Inc Time Value Factor Summary TV decreases as the expiration date approaches. TV decreases as the expiration date approaches. TV decreases as the in-the-money amount increases. TV decreases as the in-the-money amount increases. TV is higher for stocks with higher volatility. TV is higher for stocks with higher volatility. TV is higher when the risk free rate of return is higher. TV is higher when the risk free rate of return is higher.

Copyright Net Worth Strategies, Inc Equity Compensation Taxation

Copyright Net Worth Strategies, Inc. 2011Taxation Unavoidable! Unavoidable! Occurs when the client takes ownership by exercising stock options or when RSAs vest Occurs when the client takes ownership by exercising stock options or when RSAs vest Incentive Stock Options (ISOs): Incentive Stock Options (ISOs): ISO’s trigger Alternative Minimum Tax (AMT) ISO’s trigger Alternative Minimum Tax (AMT) AMT planning is critical to optimize & avoid problems AMT planning is critical to optimize & avoid problems Non Qualified Stock Options (NQSOs), Stock Appreciation Rights (SARs), & RSAs: Non Qualified Stock Options (NQSOs), Stock Appreciation Rights (SARs), & RSAs: Taxed at ordinary income rates (compensation) Taxed at ordinary income rates (compensation) Cashless Exercise: sale proceeds used to pay exercise price and withheld for taxes Cashless Exercise: sale proceeds used to pay exercise price and withheld for taxes

Copyright Net Worth Strategies, Inc ISOs: Tax Consequences $100 $0 Strike price FMV at exercise FMV at sale AMT adjustment AMT C.G.

Copyright Net Worth Strategies, Inc $100 $0 Strike price FMV at exercise FMV at sale Compensation Income NQSOs: Tax Consequences Capital Gains

Copyright Net Worth Strategies, Inc $100 $0 Grant Vest FMV at sale Compensation Income Regular C.G. RSAs: Tax Consequences Capital Gains

Copyright Net Worth Strategies, Inc RSA 83(b) Election Accelerates taxation from date of vest to date of grant Accelerates taxation from date of vest to date of grant Starts CG holding period Starts CG holding period Eliminates taxation at vesting Eliminates taxation at vesting Must be made within 30 days of the grant (or early exercise) Must be made within 30 days of the grant (or early exercise) Election made by filing document with IRS Election made by filing document with IRS Election is irrevocable Election is irrevocable

Copyright Net Worth Strategies, Inc $100 $0 Grant Vest FMV at sale Compensation Income 83b Election Original C.G. Additional C.G. RSAs: 83b Consequences

Copyright Net Worth Strategies, Inc Taxation Summary Unavoidable (gifting retains tax liability)! Unavoidable (gifting retains tax liability)! Employee Stock Options: Employee Stock Options: NQSOs & SARs – compensation income when “Exercised” NQSOs & SARs – compensation income when “Exercised” ISOs – AMT planning is crucial ISOs – AMT planning is crucial Restricted Stock Awards: Restricted Stock Awards: Compensation income when restrictions lapse (vest) Compensation income when restrictions lapse (vest)

Copyright Net Worth Strategies, Inc StockOpter ® Analysis Output

Copyright Net Worth Strategies, Inc Betty Crocker Example Financial Goal: $1,500,000 Financial Goal: $1,500,000 Diversified Portfolio Value: $750,000 Diversified Portfolio Value: $750,000 Company: GIS (General Mills, Inc.) Company: GIS (General Mills, Inc.) Current Stock Price: $60.00 Current Stock Price: $60.00 Stock Volatility: 25% Risk Free Rate: 4.4% (10K) Stock Volatility: 25% Risk Free Rate: 4.4% (10K) Income Tax Rate: 40% Cap Gains: 22% (Fed+State) Income Tax Rate: 40% Cap Gains: 22% (Fed+State) Stock Options: Stock Options: 7 – NQSOs: 21,625 vested & 13,160 unvested 7 – NQSOs: 21,625 vested & 13,160 unvested Shares: Shares: 1,500 shares held (cost basis: $75,000) 1,500 shares held (cost basis: $75,000) 10,000 RSAs (cost basis: $0) 10,000 RSAs (cost basis: $0)

Copyright Net Worth Strategies, Inc StockOpter Tables/Charts In-the-Money Values* In-the-Money Values* After Tax Values (full analysis) After Tax Values (full analysis) Black Scholes, Time and Forfeit Values* Black Scholes, Time and Forfeit Values* Restricted Shares / Units Values* Restricted Shares / Units Values* Owned Share Values (full analysis) Owned Share Values (full analysis) Leverage* Leverage* Financial Goals (full analysis) Financial Goals (full analysis) Concentration (full analysis) Concentration (full analysis) Key Ratios* Key Ratios* * Included in Equity Comp. Benefit Statement

Copyright Net Worth Strategies, Inc In-the-Money Valuation ITM Value = Current Value ($60) – Exercise Price x Shares

Copyright Net Worth Strategies, Inc After Tax Valuation Cash Out Value = ITM Value – Potential Tax (calculated by applying a 40% income tax rate)

Copyright Net Worth Strategies, Inc Black Scholes Valuation Compare to ITM Value of $333,204 Black Scholes Value = Time Value + ITM Value

Copyright Net Worth Strategies, Inc Option Forfeit Valuation Forfeit Value ® $384,544 Vs. ITM Value of Unvested: $13,160 Forfeit Value = Time Value of Vested + BSV of Unvested

Copyright Net Worth Strategies, Inc Restricted Share Values Shows estimate tax liabilities & net shares at vesting Gross RSA Value = Shares * FMV

Copyright Net Worth Strategies, Inc Total Forfeit Value Total Forfeit Value = Option Forfeit Value + RSA Value

Copyright Net Worth Strategies, Inc Owned Share Valuation GIS Stock Price: $60 After Tax Value of Owned Shares = Share * Price – Basis * Cap Gains Rate (22%)

Copyright Net Worth Strategies, Inc. 2011Leverage A 20% increase in stock price yields a % increase in ITM value A 20% decrease in stock price yields a 76.16% decrease in ITM value

Copyright Net Worth Strategies, Inc Financial Goal Attainment Financial Goal Value of Diversified Portfolio (VDP) Vested share goal status at various prices

Copyright Net Worth Strategies, Inc. 2011Concentration 39% of portfolio is in company stock or options Pre-Tax Values

Copyright Net Worth Strategies, Inc Key Ratios This grant’s “Insight Ratio” means 87.81% of its full value is ITM Value

Copyright Net Worth Strategies, Inc Insight Ratios The Insight Ratio is TV divided by BSV The Insight Ratio is TV divided by BSV Represents the remaining theoretical potential Represents the remaining theoretical potential 10% means 90% of theoretical potential has been achieved 10% means 90% of theoretical potential has been achieved Provides a framework for diversifying based on risk v. reward Provides a framework for diversifying based on risk v. reward Planning horizon and risk profile are key considerations Planning horizon and risk profile are key considerations

Copyright Net Worth Strategies, Inc Insight Ratio Factors Proximity to retirement? Proximity to retirement? Bullish on company growth prospects? Bullish on company growth prospects? Concerned with negative leverage? Concerned with negative leverage? Close to achieving a financial goal? Close to achieving a financial goal? Concentrated position? Concentrated position? Upcoming cash-flow requirements? Upcoming cash-flow requirements?

Copyright Net Worth Strategies, Inc Key Ratio Considerations* Risk Profile Insight Ratio (TV/BSV) Short/Conservative30%-50% Medium/Moderate11%-29% Long/Aggressive<10% * These are only guidelines for establishing individual decision criteria

Copyright Net Worth Strategies, Inc Decision Support Resources & Tools

Copyright Net Worth Strategies, Inc Decision Support Making timely & informed equity comp. decision is an ongoing process Making timely & informed equity comp. decision is an ongoing process Resources: Resources: Online: Online: Personalized Reports Personalized Reports What-if Dashboards & Concept Videos What-if Dashboards & Concept Videos Nightly Monitoring of Decision Triggers Nightly Monitoring of Decision Triggers Financial Advisors (specializing in equity comp.) Financial Advisors (specializing in equity comp.) LinkedIn Group: Equity Compensation Recipients – Decision Support LinkedIn Group: Equity Compensation Recipients – Decision Support

Copyright Net Worth Strategies, Inc. 2011

StockOpter.com Access: Access: URL: URL: UserID: work UserID: work Password: temp (case sensitive) Password: temp (case sensitive) Terms: Terms: 60 Days no-charge 60 Days no-charge Annual Subscription: $95 Annual Subscription: $95

Copyright Net Worth Strategies, Inc Next Steps Review your E/C Benefit Statement Review your E/C Benefit Statement Visit: StockOpter.com Visit: StockOpter.com Update My Data & review Dashboards Update My Data & review Dashboards View Concept Videos View Concept Videos Create your Personal Equity Profile report Create your Personal Equity Profile report Review and modify Monitoring triggers Review and modify Monitoring triggers Review this information with your advisor Review this information with your advisor

Copyright Net Worth Strategies, Inc Questions?

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