Opting for negotiation and understanding

By Esther Chapman, InfoWorld |  Career

"You might put in writing that if there isn't a plan in place by your 1-year
anniversary with the company, you will receive monetary compensation equal to a
percentage of the value of the options. By the second anniversary, you'd receive
another percentage, if there's still no plan, and so on," Mayfield says. "In essence,
you're vesting cash in lieu of vesting options."

Term 2: Exercise price of a nonstatutory stock option

Our sample Stock Agreement Plan can be difficult for even the best minds to
decipher:

[The] exercise price of each Nonstatutory Stock Option granted prior to the Listing
Date shall be not less than eighty-five percent (85%) of the Fair Market Value of the
stock subject to the Option on the date the Option is granted. ... Notwithstanding the
foregoing, a Nonstatutory Stock Option may be granted with an exercise price loweer
than that set forth in the preceding sentence if such Option is granted pursuant to an
assumption or substitution for another option in a manner satisfying the provisions of
Section 424(a) of the Code.

Huh? Start with the exercise price of ISOs (incentive stock options), which is non-
negotiable due to Internal Revenue Service limitations. ISOs receive favorable tax
treatment, so the IRS requires the exercise price to equal or exceed the fair market
value of the stock on the date listed on the Stock Option Grant Notice -- the grant
date.

Negotiation point: ISOs aren't negotiable. But NSOs -- options that don't
meet IRS requirements to be ISOs -- are a different matter. You can negotiate the
exercise price on NSOs within the company-imposed restrictions in the Stock Option
Plan.

Our sample plan, for instance, states that the NSO exercise price cannot be less
than 85 percent of the fair market value on the date of grant. So if the shares in our
sample plan were worth $10, the company might agree to an exercise price as low as
$8.50 a share.

This situation is possible, but fairly unusual, Dunn says. "A below-market exercise
price causes the company to reflect an accounting expense. And since this reduces
earnings, most companies will not want to do this," he says.

Term 3: Vesting provisions

Twenty-five percent (25%) of the shares vest one year after the Vesting
Commencement Date. Twenty-five percent (25%) of the shares vest monthly thereafter over
the next three (3) years.

Simply put, vesting is the "when" of playing your options, the date at which they
become available to exercise.

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