Attention CEPI students: Since 2020, the CEPI curriculum has been all-digital, and the CEPI provides you digital access to the books, including this, as part of the exam fee. You still can buy the printed books from us as a supplement to the free digital access you receive from the CEPI. See our CEPI information page.
Our standard introductory guide for company owners, managers, and advisors is The Stock Options Book, which covers a multitude of issues relating to stock options and stock purchase plans. This book goes a step beyond The Stock Options Book with extensive information on particular issues such as securities laws. (Many people get both books; for example, the Certified Equity Professional Institute has adopted both as texts for all three levels of its main program plus its accounting designation.) The book addresses administration, state securities laws, federal securities laws, preparing for an IPO, handling death under a stock option plan, stock options and divorce, evergreen provisions, underwater options and repricing, designing and implementing an employee stock purchase plan (ESPP), the role of the transfer agent, annual meetings, and plan design and communication issues. A lengthy glossary rounds out the book.
For the 17th edition (2021), chapters 1, 2, 5, 6, 11, 12, and 13 were revised and updated, and the book was re-typeset in a larger, easier-to-read font for the benefit of both print and digital readers.
Table of Contents
1. Administering an Employee Equity Plan
2. Federal Securities Law Considerations for Equity Compensation Plans
3. State Securities Law Considerations for Equity Compensation Plans
4. Preparing for an Initial Public Offering
5. Executive and Equity Compensation Considerations After an IPO
6. Equity Considerations in Merger and Acquisition Transactions
7. Handling Death Under an Equity Compensation Plan
8. Evergreen Provisions for Equity Compensation Plans
9. Repricing Underwater Stock Options
10. Equity Awards in Divorce
11. Designing and Implementing an Employee Stock Purchase Plan
12. The Role of the Transfer Agent
13. Annual Meetings
Appendix: A Layperson's Glossary of Employee Stock Plan Terminology
About the Authors
About the NCEO
From Chapter 1, "Administering an Employee Stock Option Plan"
A “same-day sale” exercise is a means by which an optionee can finance the exercise of a stock option by immediately selling through a securities brokerage firm all of the option shares underlying the stock option being exercised. The proceeds of the sale are remitted to the employee after deducting the total required option exercise price for the option shares being purchased plus any withholding taxes due to the company (which amounts are remitted directly to the company).
A company may make formal arrangements with one or more securities brokerage firms to facilitate “same-day sale” exercises. Not only do such arrangements simplify the administration of these programs, they also enable the transactions to be completed more expeditiously. Accordingly, companies use these programs with increasing frequency. In these arrangements, sometimes referred to as “captive broker” programs, the company keeps the securities brokerage firm or firms updated on outstanding stock options and vested shares, thereby enabling the optionee to contact the brokerage firm directly when he or she wants to exercise a stock option. To further simplify the administration of these transactions, some companies establish an “omnibus” account with one or more securities brokerage firms and transfer a block of shares to the account for the purpose of ensuring that sufficient shares are available to deliver upon the settlement of the sale.
Following the sale, the company is notified of the sale price so that the required withholding taxes, if any, can be calculated. This figure is then transmitted to the securities brokerage firm so that it can divide the sales proceeds between the company and the optionee.
Generally, within the settlement period (currently two business days from the trade date), the securities brokerage firm will remit to the company the portion of the sales proceeds necessary to cover the total required option exercise price for the option shares being purchased and any associated withholding taxes due to the company. This amount is usually paid by check, by wire transfer, or through a deposit into the company’s account at the securities brokerage firm.
Typically, the company will not instruct its transfer agent to deliver shares for the “same-day sale” to the securities brokerage firm until payment of the option exercise price has been made. Upon receipt of the shares, the transaction will be completed and the balance of the sale proceeds, less brokerage commissions, is remitted to the employee.
Where employees are not able to initiate a “same-day sale” transaction electronically, an optionee who wishes to execute such a transaction will first contact the plan administrator and indicate his or her decision to exercise a vested stock option. The optionee will complete the required forms for a standard stock option exercise (typically, a stock option exercise notice) and the additional forms necessary for a “same-day-sale” exercise (such as a set of irrevocable instructions to the company, a stock transfer power, a Form W-9, and, if a brokerage account needs to be established, a new account form or a margin agreement form).
From Chapter 6, "Equity Considerations in Merger and Acquisition Transactions"
Once the letter of intent is signed by both the buyer and seller, the buyer conducts in-depth research while the purchase/merger agreement is drafted. At this stage, more individuals are made aware of the potential transaction, and the special blackout is expanded to include these individuals. Data is usually shared freely between the buyer and seller, but some employee information may be redacted to protect the seller in the event that the transaction is not completed and to comply with data privacy regulations, such as the European Union’s General Data Privacy Regulation (GDPR).
The buyer’s equity plan administrators should be included as subject matter experts at this stage to review the seller’s equity documents and seek proof of the seller’s compliance with legal and tax regulations. There are a number of items and issues to review closely during due diligence, including but not limited to:
- Plans and agreements. The buyer’s equity plan administrator should review copies of all plans under which equity has been issued by the seller and all agreements under which equity has been granted. Plan definitions of change in control are particularly important to the administrator’s work of analyzing the impact the merger or acquisition may have on outstanding equity grants. Also, note that different forms of agreements may exist under these plans. Executives may have special agreements relating to acceleration of vesting upon change in control. These provisions may be contained in their equity agreements or in other agreements, such as offer letters or severance agreements, all of which are important to this analysis and should be provided to the buyer’s equity plan administrator.
- Legal compliance issues. There are a wide range of legal compliance issues that equity plan administrators may find during due diligence. Are the seller’s U.S. and international securities law filings up to date? Are there any unregistered equity offerings that do not qualify for an exemption (e.g., under Rule 701 or Regulation D)? If so, are the exemptions documented in detail? Have data privacy consents been obtained from grantees outside the U.S., or are there data privacy violations? Any instance of non-compliance uncovered should be escalated for review to the legal department for a decision on the materiality of the issue.
- Tax compliance issues. Are all grants exempt from or compliant with Section 409A? Are employee elections under Section 83(b) properly documented? Does the seller allow Section 83(i) elections and, if so, are employee elections properly documented? At a taxable event, does the seller properly withhold taxes and report gain to the relevant tax authority? For any tax-favored programs, are all requirements and filings completed in a timely manner? Are mobile employees taxed properly in each jurisdiction?
- Litigation. Are there any outstanding claims or lawsuits involving the company’s equity compensation? Are the lawsuits related to employee claims or are they family law claims, such as divorce?