Copyright Net Worth Strategies, Inc. - PowerPoint Presentation

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Copyright Net Worth Strategies, Inc. - PPT Presentation

2011 Making Timely amp Informed Equity Compensation Decisions An Employee Workshop from Net Worth Strategies Inc Copyright Net Worth Strategies Inc 2011 Workshop Objectives Provide unique insights regarding ones company stock and option holdings ID: 782076

worth net 2011 strategies net worth strategies 2011 copyright stock option price time options equity amp compensation tax exercise

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Slide1

Making Timely & InformedEquity CompensationDecisions

An Employee Workshop from:

Net Worth Strategies, Inc.

Slide2

Workshop ObjectivesProvide unique insights regarding one’s company stock and option holdingsFacilitate timely diversification decisions to maximize the value of your grants

Introduce a new platform for equity compensation recipient communication & decision support

Slide3

BackgroundNet Worth Strategies, Inc.:The leading provider of equity compensation education, communication & decision support solutions

Program Components:

Workshop Presentation

Equity Compensation Benefit Statement

Access to

www.StockOpter.com

Slide4

AgendaMyths and Truths about Equity Comp.Overview of StockOpter

Equity Compensation Benefit Statement

Equity Compensation Concepts & Taxation

StockOpter Analysis Output

Resources and Tools

Slide5

Equity CompensationMisconceptions &

Truths

Slide6

Common MisconceptionsGetting assistance or creating an equity comp. strategy is unnecessary

One should exercise / sell when:

Options expire or employment is terminated

Money is needed

Stock price target is met

Taxation can be avoided

I’m now getting Restricted Stock Grants so managing my Stock Options is unnecessary

Slide7

Equity Comp. Truths

Careful planning and professional assistance facilitates better decisions & reduces costly mistakesExercise / sell decisions should be based on:Remaining time value / leverage not stock price aloneFinancial goals not just cash flow requirementsLevel of concentration in company stock and optionsTaxes are unavoidable but they can be managed

Outstanding Stock Option Grants still require timely action

Slide8

StockOpter® Equity Compensation Benefit Statement

Slide9

Equity Comp Benefit Stmt.*Grant Summary & Key FindingsStock Option Valuation

In-the-Money Value Table

Time / Black Scholes Value Table

Restricted Share Value Table

Forfeit Value Calculations

Leverage Table

Insight Ratios Table (Stock Options)

All Reported Dollar Amounts are Pre-Tax

Slide10

Equity Compensation Concepts

Slide11

What are Stock Options?Definition:A grant of the right to purchase company stock in the future at a fixed (grant) price

Grant Price:

(aka – exercise, strike or option price)

It is the price at which an employee can exercise the stock option, once vested

Vesting Date:

The date when a traunch of options can be exercised

Slide12

Stock Option DefinitionsBargain Element: (aka: Spread)

The difference between the option exercise price & the market price of the stock at exercise

Exercise:

The process of purchasing the option shares at the grant price

Selling:

Selling the purchased shares stock of an exercised option (the option itself is not sold)

Slide13

Restricted Stock DefinitionsRestricted Stock Award = RSAA Grant of employer stock at no cost or substantial discount that is subject to restrictions

AKA: Restricted Stock Unit = RSU

Types of Restrictions

Time Vesting

(i.e. Future Date)

Performance Vesting

(i.e. Revenue Target)

Slide14

Stock Option ValuationIn-the-Money Value (ITMV):Fair Market Value (FMV) – Grant Price x Shares

Option Value

(aka: Full or Black-Scholes Value [BSV])

Made up of two components:

In-the-Money Value +

Time Value (TV)

Time Value is estimated using methodologies including the Black-Scholes formula

BSV

= TV + ITMV

Slide15

Time Value Illustration

Strike Price

Option Price

Expiry Jan. 2010

Expiry Jan. 2011

50.00

10.20

11.50

60.00

3.00

5.30

60.54

Last Trade As of 9/9/09

65.00

1.05

3.10

70.00

0.25

1.75

In the Money

Under Water

General Mill (GIS) Market Traded Options as of Sept 9, 2009

Slide16

Option Valuation MethodsPractical Applications:Valuing Market Traded Options

Expensing Stock Options on Financial Statements

Valuing Employee Stock Options for decision support

Black-Scholes is the most broadly used and practical model for valuing employee stock options for decision support because the assumptions used are less complicated than alternatives

The Binomial model is an alternative to Black-Scholes that financial experts believe can produce lower values for expensing purposes because it uses changes in volatility and option-forfeiture rates

Slide17

Estimating Time ValueThe Black Scholes formula calculates the Time Value of a stock option using the following factors:

Time until expiration

Volatility of the stock price

The In-the-money value / Leverage

Risk free rate of return (RFR)

Per share dividend

Slide18

Time Until Expiration

Total Option Value

Years

Time Value Element

Spread

Time Value decreases as the expiration date approaches.

Slide19

Stock Price VolatilityThe annualized standard deviation of the stock's changes in price Expressed as a percentage (i.e. std dev of 0.3 is volatility of 30%)Statistical method to provide range of possible stock prices over option life

Types of Volatility:

Historical

: the actual volatility that occurred to the underlying stock during some look back time period

Implied

: the market's estimate of future volatility derived from the option's bid/ask mid price

Slide20

GIS Volatility

12 Month Price Volatility of GIS Stock

A volatile stock has a higher upside potential over time. The greater the volatility, the higher the Time Value.

Slide21

Volatility SelectionDepends on application:Valuing Employee Stock Options for decision support

Expensing Stock Options on Financial Statements

Analyzing Market Traded Options

Consequently, selection is “art” not science

Compare a variety of sources to validate:

Company Annual Report (SEC Filings)

Market Traded Options: www.ivolatility.com

Peer Comparisons (use for private companies)

Slide22

In-the-Money Value

As the ITM value increases, TV decreases because upside leverage is less.

Slide23

Stock Option Leverage

High Leverage/TV: stock price is close to the option price...

Low Leverage/TV: option has significant ITM value...

The higher the current stock price is relative to the strike price, the less time value or upside leverage remains in the option.

Slide24

Risk Free Rate of ReturnAn option provides the holder with the right to own stock at a certain price without having to purchase the stock…

Consequently, an option’s value is enhanced by the ability to use the capital that would otherwise be invested in the stock for some other investment…

The Risk Free Rate represents the return on this other investment which enhances the value of the stock option

The higher the risk-free rate of return, the higher the BSV and TV of the option.

Slide25

The Risk Free Rate AffectFor option valuation purposes:

The Risk Free Rate can be derived from the yield on US Treasury bills or from similar investments

This value can also be found in the company’s annual report for the purpose of option expensing

The higher the Risk Free Rate of Return, the higher the Time Value of the option.

Slide26

Per Share DividendDecrease an option’s Time Value because the holder is forgoing the dividend until the time of exerciseA dividend can produce negative Time Value depending on the other BSV factors

The inclusion of a dividend is not relevant if you intend to exercise and sell immediately for diversification purposes

The Time Value of an option is lower when the dividend is factored in.

Slide27

Time Value Factor SummaryTV decreases

as the expiration date approaches.

decreases

as the in-the-money amount increases.

TV is

higher

for stocks with higher volatility.

TV is

higher

when the risk free rate of return is higher.

Slide28

Equity Compensation Taxation

Slide29

TaxationUnavoidable!Occurs when the client takes ownership by exercising stock options or when RSAs vest

Incentive Stock Options (ISOs):

ISO’s trigger Alternative Minimum Tax (AMT)

AMT planning is critical to optimize & avoid problems

Non Qualified Stock Options (NQSOs), Stock Appreciation Rights (SARs), & RSAs:

Taxed at ordinary income rates (compensation)

Cashless Exercise: sale proceeds used to pay exercise price and withheld for taxes

Slide30

ISOs: Tax Consequences

$100

Strike price

FMV at exercise

FMV at sale

AMT adjustment

AMT

C.G.

Slide31

$100

Strike price

FMV at exercise

FMV at sale

Compensation

Income

NQSOs:

Tax Consequences

Capital Gains

Slide32

$100

Grant

Vest

FMV at sale

Compensation

Income

Regular C.G.

RSAs:

Tax Consequences

Capital Gains

Slide33

RSA 83(b) ElectionAccelerates taxation from date of vest to date of grant Starts CG holding periodEliminates taxation at vesting

Must be made within 30 days of the grant (or early exercise)

Election made by filing document with IRS

Election is irrevocable

Slide34

$100

Grant

Vest

FMV at sale

Compensation

Income

83b

Election

Original C.G.

Additional C.G.

RSAs: 83b Consequences

Slide35

Taxation SummaryUnavoidable (gifting retains tax liability)!Employee Stock Options:NQSOs & SARs – compensation income when “Exercised”

ISOs – AMT planning is crucial

Restricted Stock Awards:

Compensation income when restrictions lapse (vest)

Slide36

StockOpter® Analysis Output

Slide37

Betty Crocker ExampleFinancial Goal: $1,500,000

Diversified Portfolio Value:

$750,000

Company:

GIS

(General Mills, Inc.)

Current Stock Price:

$60.00

Stock Volatility:

25%

Risk Free Rate:

4.4%

(10K)

Income Tax Rate:

40%

Cap Gains:

22%

(Fed+State)

Stock Options:

7 – NQSOs:

21,625 vested & 13,160 unvested

1,500 shares held

(cost basis: $75,000)

10,000 RSAs

(cost basis: $0)

Slide38

StockOpter Tables/ChartsIn-the-Money Values*

After Tax Values

(full analysis)

Black Scholes, Time and Forfeit Values

Restricted Shares / Units Values

Owned Share Values

(full analysis)

Leverage

Financial Goals

(full analysis)

Concentration

(full analysis)

Key Ratios

* Included in Equity Comp. Benefit Statement

Slide39

In-the-Money Valuation

ITM Value = Current Value ($60) – Exercise Price x Shares

Slide40

After Tax Valuation

Cash Out Value = ITM Value – Potential Tax (calculated by applying a 40% income tax rate)

Slide41

Black Scholes Valuation

Compare to ITM Value of

$333,204

Black Scholes Value = Time Value + ITM Value

Slide42

Option Forfeit Valuation

Forfeit Value

$384,544

Vs. ITM Value of Unvested:

$13,160

Forfeit Value = Time Value of Vested + BSV of Unvested

Slide43

Restricted Share Values

Shows estimate tax liabilities & net shares at vesting

Gross RSA Value =

Shares * FMV

Slide44

Total Forfeit Value

Total Forfeit Value =

Option Forfeit Value + RSA Value

Slide45

Owned Share Valuation

GIS Stock Price:

$60

After Tax Value of Owned Shares =

Share * Price – Basis * Cap Gains Rate (22%)

Slide46

Leverage

A 20%

increase

in stock price yields a

104.65%

increase

in ITM value

A 20%

decrease

in stock price yields a

76.16%

decrease

in ITM value

Slide47

Financial Goal Attainment

Financial Goal

Value of Diversified Portfolio (VDP)

Vested share goal status at various prices

Slide48

Concentration

39%

of portfolio is in company stock or options

Pre-Tax Values

Slide49

Key Ratios

This grant’s “Insight Ratio” means

87.81%

of its full value is ITM Value

Slide50

Insight Ratios The Insight Ratio is TV divided by BSVRepresents the remaining theoretical potential10% means 90% of theoretical potential has been achieved

Provides a framework for diversifying based on

risk v. reward

Planning horizon and risk profile are key considerations

Slide51

Insight Ratio FactorsProximity to retirement?Bullish on company growth prospects?

Concerned with negative leverage?

Close to achieving a financial goal?

Concentrated position?

Upcoming cash-flow requirements?

Slide52

Key Ratio Considerations*

Risk Profile

Insight Ratio

(TV/BSV)

Short/Conservative

30%-50%

Medium/Moderate

11%-29%

Long/Aggressive

<10%

* These are only guidelines for establishing individual decision criteria

Slide53

Decision SupportResources & Tools

Slide54

Decision SupportMaking timely & informed equity comp. decision is an ongoing process

Resources:

Online:

www.StockOpter.com

Personalized

Reports

What-if

Dashboards

Concept Videos

Nightly

Monitoring

of Decision Triggers

Financial Advisors

(specializing in equity comp.)

LinkedIn Group:

Equity Compensation Recipients – Decision Support

Slide55

Slide56

Slide57

Slide58

Slide59

Slide60

Slide61

Slide62

Slide63

Slide64

Slide65

StockOpter.comAccess:URL: www.StockOpter.com/participants UserID:

work email

Password:

temp

(case sensitive)

Terms:

60 Days no-charge

Annual Subscription:

$95

Slide66

Next StepsReview your E/C Benefit StatementVisit:

StockOpter.com

Update

My Data

& review

Dashboards

View

Concept Videos

Create your

Personal Equity Profile

report

Review and modify

Monitoring

triggers

Review this information with your advisor

Slide67

Questions?nwsi_info@networthstrategies.com

Slide68

Thank You for Attending

Copyright Net Worth Strategies, Inc. - PowerPoint Presentation

Copyright Net Worth Strategies, Inc. - PPT Presentation

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