1. Getting Your Accounting World in Shape Scott B. Kaplowitch Partner, Edelstein sbk@edelsteincpa.com www.edelsteincpa.com

2. Agenda Starting Out Items to think about Roles Chart of accounts Equity-oriented compensation plans Section 83(b) election Common Do’s and Don’ts Other equity-based compensation plans

3. Accounting Roles Bookkeeper Enters day-to-day transactions (activities of a business) Cuts checks, makes deposits, reconciles cash Does cyclical/transactional work

4. Accounting Roles (continued) Accountant (CPA) Designs processes for bookkeepers to follow Implements accounting policies and procedures to ensure GAAP compliance Builds financial reports and models Provides strategic advice

5. Bookkeeper vs. Accountant Cost Experience and resources Proactive vs. reactive

6. Accounting Roles (continued) Controller Oversees budgeting Focuses on spending, revenue, and profitability Chief Financial Officer Heads the financial function in a company or division Oversees both controller and treasury functions

7. What is a Chart of Accounts?

8. How to choose the right accountant What are you looking for? Qualifications Industry experience Finding firms Contact firms Size of firm Type of services (data entry or full FP&A function) Frequency of reporting (monthly quarterly, yearly) Bookkeeper CPA Firm with industry or similar expereince Local resources e.g., Boston Business Journal Business associates and friends Google Meet partners and staff Get a proposal Ask for references

9. Transition Period Phase I Hourly / temporary Transaction focus only Simple reports Phase II Hourly / temporary More of a financial focus Budgets / cash flows Monitor / process development Phase III Permanent staff Operations and finance integration Frequent reporting Differential analysis / decision support Tax implications (stock options) Phase IV Hire controller / CFO Required reporting More board interaction Fund raising & term sheet analysis

10. Stock Terminology Stock Option: contractual right granted to an employee to purchase shares of employer’s stock in the future in accordance with a specified plan Grant Date: date on which employee receives stock option Vesting Date: date on which employee has right of ownership

11. Stock Terminology (continued) Exercise Date: date shares are purchased Exercise Price: price at which option may be purchased Sale Date: date when exercised options are sold

12. Stock Terminology (continued) Expiration Date: date option will expire IRC Sec. 83b: election made by recipient of restricted stock to include FMV of shares on date of grant in gross income IRC 409 A: adopts a broad definition of nonqualified compensation

13. Incentive Stock Options (ISO) Requirements Granted pursuant to a plan Granted within 10 years of adoption or shareholder approval Exercise price ≥ FMV at time option is granted Nontransferable Granted to employee who owns ≤10% of the corporation

14. The total FMV of options first exercisable by any grantee during a calendar year must be ≤ $100,000 Must be granted to employee of: granting corporation parent or subsidiary of the granting corporation corporation that assumes the options

15. Nonqualified Stock Options (NQSO) Stock option that does not meet requirements of an incentive stock option Employee is taxed when option is exercised

16. Planning for Income Recognition Upon Receipt of NQSO’s 4-Step Analysis: 1. Consider tax impact at the Grant Date 2. Tax substantially vested stock at the Exercise Date 3. Defer tax on restricted stock until substantially vested 4. Consider Section 83(b) election on restricted stock upon exercise date

17. Stock Option Example ISO: An employee is granted an ISO on March 1st 2012 to purchase 1,000 shares in his/her company for $10/share, the current market price of the stock. The option is redeemable one year from the grant date and expires March 1, 2022. NQSO: Same as above, however the NQSO is granted at a discounted rate of $8/share.

18. Stock Option Example (continued) ISONQSO Grant Date = March 1, 2010 Option to purchase 1,000 shares No tax consequences (assume option not traded on a securities exchange) Exercise Date = July 1, 2011 Purchase 1,000 shares FMV = $15/share No tax consequences for regular tax (AMT tax possible) Recognize income equal to excess of FMV of stock over option price $7,000 = ($15 - $8)*1,000 Taxed at ordinary income rates (assume stock received is substantially vested) Taxation upon Sale Disqualifying disposition = ordinary income (Sale within two years of grant date or one year of exercise date) OR Capital gain

19. Restricted Stock A grant of company stock in which the recipient’s rights in the stock are restricted until the shares vest. Company can transfer its stock to its employees at no cost Consider Section 83(b) election

20. Section 83(b) Election Definition: When an employee receives restricted stock, he/she must decide whether to pay taxes at its current value when the stock is received or when it vests. This election must be made within 30 days of receiving the stock.

21. Section 83(b) Election (continued) YES (election for 83(b)): Employee recognizes income on date of receipt and pays tax on compensation amount of stock received. He/she pays capital gains tax on stock when it is sold. NO (election against 83(b)): Employee will pay tax at ordinary income tax rates on date time restrictions lapse. This tax will be higher assuming that stock has appreciated.

22. 83(b) Election Example In return for services, you receive 5,000 shares of restricted stock in a startup company when the shares are worth $1.00. Shortly thereafter, the company goes public and is extremely successful. When the shares vest three years from now, they are trading at $60.

23. 83(b) Election Example (continued) NO (election against 83(b)): Report nothing when you receive the shares Report $300,000 of ordinary income when the shares vest, paying close to $120,000 in federal income tax

24. 83(b) Election Example (continued) YES (election for 83(b)): Report $5,000 of ordinary income when you make the election Do not report income at the time stock vests. If you sell the stock for $300,000 after holding for more than a year, you will report $295,000 of long-term capital gain saving approximately $80,000 in taxes

25. 83(b) Election Summary Section 83(b) election makes sense when: The amount of income you’ll report when you make the election is small and the potential for growth in value of the stock is great You expect reasonable growth in the value of the stock and the likelihood of a forfeiture is very small

26. 83(b) Election Summary (continued) Section 83(b) election does not make sense when: A forfeiture is likely You’ll pay a lot of tax at the time of the election with only modest prospects of growth in the stock’s value

27. Sample 83(b) Election Form

28. Common Do’s and Don’ts Recordkeeping Stock for Service Reporting & recording AMT tax preference item upon exercising ISO Deferred Compensation Plan Document Dilution Different classes of stock

29. Other Executive Compensation Options That Do No Dilute Ownership Equity-oriented plans paid in cash Stock Appreciation Rights Phantom Stock Plans Employee Stock Purchase Plans

30. Executive Compensation Plans Type of Plan SARsPhantom Stock Restricted Stock Incentive Stock Options Nonqualified Stock Options Benefit Measured by Increase in value of shares Increase in value of shares and dividends Difference between option price and fair market value upon exercise Benefit PaidCash or sharesRestricted stockOption exercisable in stock Employee's Income Taxation No taxation until employee receives payments; taxation depends upon payment medium Ordinary income when stock is vested Upon sale, capital and ordinary income as determined by special holding period rules Upon exercise, taxation is the same as restricted stock Employer's Income Taxation No deduction until payment to employee is made and the employee includes the payment in income No deduction until employee recognizes taxable income Deduction for the ordinary income recognized No deduction until employee recognizes taxable income

31. ANY FINAL QUESTIONS? 31 Remember to Complete the Speaker Survey: cic15.bfbootcamp.net / ‘click’ on speakers / select your speaker Scott B. Kaplowitch Partner, Edelstein sbk@edelsteincpa.com www.edelsteincpa.com