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Vesting
There’s usually a waiting, or vesting, period between when the options are granted and when your client is eligible to exercise them. Michael Friedman, a partner at McMillan LLP in Toronto, points to five common vesting conditions.
1 Employment tenure
If, for instance, the options vest at a rate of 25,000 per year over four years, the agreement may say:
› after one year, she can buy 25,000 shares
at $20;
› after two years, she can buy another 25,000
shares at $20;
› after three years, she can buy another 25,000
at $20;
› after four years, she can buy the final 25,000
at $20.
2 Employee performance evaluations
Companies may have elaborate evaluation matri-
ces, and link vesting to performance.
3 Company performance
4 Performance of employee’s division within the
company
5 Company’s market share versus competitors
For 3, 4 and 5, vesting occurs when company-mandated targets are achieved.
Tax consequences
When your client is granted options, there are no immediate tax implications, Friedman notes. Tax kicks in when she exercises the options, assuming she’s employed by a public company (for rules on private companies, see “Private company stock options,” page 31).
“Tax calculation,” on page 29, illustrates how the process would work.
Friedman notes that three elements are needed to qualify for a deduction on stock option income:
1 the shares have to be prescribed shares, which
essentially means plain-vanilla common shares;
2 there has to be an arm’s-length relationship be-
tween your client and their employer firm; and
3 the options cannot be in-the-money, so the
amount your client pays to acquire the shares after the options vest must equal the stock’s FMV at the time the options are granted.
For instance, if the FMV of the company’s stock
is $20 when your client is offered employment, the
NOT CREATED EQUAL
People tend to think stock options can make them rich. But not all plans are created equal, and some aren’t even that attractive, notes Bernard Pinsky, a partner at Clark Wilson LLP in Vancouver.
“People think more about [option] price and how many they get, and they probably don’t think much about [the plan’s] specific terms, such as what happens on death. And, probably, no one thinks they’re going to die in the next little while [so as to] make it important
to them.”
He says plan documents typically aren’t overly complicated, so in most cases it isn’t necessary to get help from a lawyer. But clients have to read the plans, because there may be terms they won’t like.
“If [your client] has the ability to negotiate terms with [her] em- ployer, one of the things [she] should negotiate is the ability to have all unvested options vest on death, with no specific limitations just because [she] passed away.”
Adds Lisa Goodfellow, a partner at Miller Thomson LLP in Toronto: “In most cases, an executive has absolutely no control over what the stock option plan says. Most company plans are written in stone, but executives with bargaining power may have an employ- ment agreement that provides a greater benefit than what the
plan offers.
“When you’re dealing with those kinds of offers, [the client] abso- lutely should get advice from an employment lawyer.”
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