Vesting Stock Grants . . .

refer to shares of stock granted or sold to an important employee or other party that are subject to future vesting conditions, such as the passing of time or the achievement of future milestones. Until the stock is vested, the company retains the right to repurchase the unvested stock at its issuance price. Growing companies frequently use vesting stock grants, together with employee elected 83(b) elections, to attract and retain important employees. Sometimes vesting stock grants are made to supplement options issued to a key employee under a qualified stock option plan.

For example, a company whose common stock fair market value is $5 per share may feel compelled to grant rights to 30,000 shares per year for three years in order to attract the level of executive it needs. Any qualified stock option plan grants that exceeded 20,000 shares (with an aggregate exercise price of $100,000) in any year, however, would not receive qualified option treatment under the current Internal Revenue regulations. By granting the prospective employee qualified options for 20,000 shares each of the three years supplemented with a grant of an additional 30,000 shares of stock which vests 10,000 shares per year the company could put together a package that meets its needs.

The employee would need to consider whether or not to file an 83(b) election on the vested share grant. Without a filing, the employee might be taxed at ordinary income rates at the time the vesting requirements are met. The tax will be assessed on the difference between the then current fair market value of the stock becoming vested at that time and his purchase price. With a properly made 83(b) election, the employee could defer his tax until he sells the stock by choosing to pay taxes, instead, on the unvested shares when they are granted. See: ISO’s (Incentive Stock Option Plans), 83(b) Election, Qualified Stock Option Plans, Unvested Stock, Vesting Schedules.