ESOPs and ESPPs Employee Stock Ownership Plans And Employee Stock Purchase Plans Dave Christensen Marcos Fernandes Lili Hsu

Employee Stock Ownership Plan ESOP Employee Stock Ownership Plan ESOP What is it? What is it? How does it work? Set up a trust Set up a trust Allocation Allocation Vesting schedule Vesting schedule Diversifying option Diversifying option Distribution Distribution

Advantages Provides a friendly buyer for the stock Owner retains control of the business Employees participate in the growth of the business Departing owner’s tax benefits on capital gain Employer’s ability to borrow money Drawbacks Application limit Repurchase shares of departing employees Cost to set up an ESOP

10 Largest Public ESOPs CompanyParticipants BellSouth Corporation 80,000 United Airlines 78,000 Honeywell55,000 The Procter & Gamble Company 40,000 Carolina Power and Light 16,000 DynCorp16,000 Lowe's Companies, Inc. 12,000 JELD-WEN9,000 Ruddick Corporation 8,935 Herff-Jones4,500

Employee Stock Purchase Plan ESPP Eligibility Eligibility Enrollment Period Enrollment Period Offering Period Offering Period Payroll Deduction Payroll Deduction Purchase Price Purchase Price Limits Limits Salary Salary Purchases Purchases Control Control

Types of ESPPs Qualified ESPPs Non-Qualified ESPPs

Qualified ESPPs’ Requirements Only company’s employees may participate Shareholders must approve it before adoption Must comply with salary, purchases and control limits All eligible employees must be allowed to participate Maximum offering periods must be respected Employees must enjoy same rights and privileges

Advantages of ESPPs Usually easy and convenient to set up Encourages savings and investing Employees don’t have to commit to a specific number of shares

ESPP Tax Treatment IRS Code Sections 421 and 423 offer special tax treatment for qualified ESPPs The sale of the stock will result in a capital gain or loss if employees hold it for: Two years from the start of the purchase period, And Two years from the start of the purchase period, And One year from the date the stock is purchased One year from the date the stock is purchased Otherwise, the sale will result in ordinary income tax on the “spread” (difference between the market price and the purchase price)

Example: Annual Income: $85,000 Tax rate: 28% 10% of Income in ESPP: $8,500 Market Price Per Share: $100 Purchase Price Per Share: $85 Shares Purchased: ($8,500/$85) = 100 Spread: $15*100 = $1,500

Sell ASAP Sell in 1year Sell in 2 years $55N/A *OIT: $420 ($10,000 - $8,500)*0.28 = $420 **ATG:-$3,420 $5,500 - $8,500 - $420 = -$3,420 ***CGT: -$3,000 ($5,500 - $8,500) = -$3,000 ATG: -$2,160 ($3,000*( )) = -$2,160 $100 OIT: $420 ($10,000-$8,500)*0.28=$420 ATG: $1,080 $10,000-$8,500-$420=$1,080 OIT: $420 ($10,000 - $8,500)*0.28 = $420 ATG: $1,080 $10,000 - $8,500 - $420 = $1,080 CGT: $300 ($10,000-$8,500)*0.2 = $300 ATG: $1,200 $10,000 - $8,500 - $300 = $1,200 $150N/A OIT: $1,820 ($15,000 - $8,500)*0.28 = $1,820 ATG: $4,680 $15,000-$8,500 - $1,820 = $4,680 CGT: $1,300 (($15,000-$8,500)*0.2) = $1,300 ATG: $5,200 $15,000 - $8,500 - $1,300 = $5,200 *OIT: Ordinary Income Tax **ATG: After Tax Gain ***CGT: Capital Gains Tax STOCKPRICESTOCKPRICE HOLDING PERIOD

Other ESPP Considerations Diversification!! Many companies that offer ESPP plans are in the high-tech sector of the economy, which often have high betas and volatile stock prices Private companies lack liquidity Public companies have lock-out periods when employees cannot buy or sell stock