GLOSSARY OF TERMS

The purpose of this limited glossary is to define some of the most commonly used or widely misunderstood terms related to stock plans. This section should be a useful reference when you encounter the following terms elsewhere in this survey.

Attestation – An affidavit or declaration of share ownership by which an optionee exercising an option by a “Stock Swap” (see below) can avoid surrendering a physical stock certificate for the shares used to exercise the option.

Bid-and-Asked Quotation – A stock price quote given in the form of a price range.  The bid is the highest price anyone has declared that he/she wants to pay for a security at a given time; the asked is the lowest price anyone will accept at the same time.

Blackout Period – A period of time prior to the release of annual or quarterly financial information during which the “Insiders” of a public company (see below) are restricted by the company’s insider trading policy from trading in company stock.

Black-Scholes – A complex mathematical formula created by Fischer Black and Myron Scholes; used to calculate the theoretical present value of a stock option at the grant date using variables such as stock price, exercise price, volatility, and expected option term to exercise.

Cashless Exercise/Same Day Sale – A transaction in which an optionee exercises a stock option and simultaneously sells some or all of the shares, with a portion of the sale proceeds delivered to the company by the broker to pay the exercise price, and related tax withholding.

Clawback – A non-compete agreement feature where option exercise profits are recouped by the company for violation of non-compete provisions.

Common Stock – Units of ownership of a corporation.  Common stockholders are typically entitled to vote on the selection of directors and other matters.  Distinguished from “preferred stock,” which generally has more favorable dividend and liquidation rights, although more limited voting rights.

Disparagement – A non-compete agreement provision feature where options are forfeited if the former employee speaks of the organization in a negative manner with the intent to condemn or discredit.

Double Trigger – A typical double trigger requires payment upon a change-in-control only if an executive’s employment is terminated by the company without any cause or by the executive for good reason.  This is referred to as a double trigger because both the change-in-control and a subsequent termination must occur in order for the executive to receive full severance payments and benefits.

Employee Groups:

• CEO and Senior Management – The organization's executive team and other senior management positions, including functional area heads.
  
  
• Middle Management – Department managers and individuals in project/team leadership roles. This group of employees reports directly to senior management level.
  
  
• Other Exempt – Includes supervisors, other professionals and salaried support staff.
  
  
• Non-exempt – Support personal compensated on an hourly basis.

Employee Stock Purchase Plan (ESPP) – A type of broad-based stock plan that permits employees to use payroll deductions accumulated over a 3, 6, 12-month, or longer purchase period to acquire stock from the company, generally at a 15% discount.  A popular type of ESPP is also known as a “Section 423 plan,” after the applicable tax code section governing this type of plan.  A non-qualified stock purchase plan would be similar to a Section 423 plan but would not satisfy all the requirements of Section 423 (e.g., a discount in excess of 15%).

Equity Security – An ownership interest in a company.  Common and preferred stock are types of equity securities.  Equity securities can be distinguished from “debt securities,” such as bonds, and from “derivative securities,” such as stock options.

Exchange Options – Options that are granted at a specified exchange rate for participants that elect to forgo cash compensation to receive options.

Exercise – The act of acquiring the underlying securities subject to a stock option by paying the “Exercise Price.”

Exercise Price – The price per share to be paid to exercise a derivative security such as a stock option.

Expiration Date – The last date that a derivative security such as a stock option can be exercised or converted to the underlying securities.

Fair Market Value (FMV) – For tax purposes, the price, based on the current market value determined by supply and demand, for which a buyer and seller would be willing to make a transaction.

Form 3 – The initial form filed with the SEC, the issuer and the issuer’s stock exchange pursuant to Section 16(a) of the Securities Exchange Act of 1934 by all directors, officers, and holders of 10% or more of any class of equity securities of the issuer.  Form 3 details the direct and indirect holdings of the issuer’s stock as well as the number of options, warrants, rights, and convertible stock or bonds.  Form 3 must be filed within ten calendar days after a person becomes a Section 16 insider, whether or not the insider owns any shares.

Form 4 – Periodic form filed with the SEC, the issuer and the issuer’s stock exchange when there has been a non-exempt change in an insider’s ownership of company stock, such as a purchase, sale or option exercise.  Form 4 must be filed by the insider within two business days of the date of the transaction.

Form 5 – Year-end form filed with the SEC, the issuer and the issuer’s stock exchange to report certain transactions exempt from Form 4 reporting and any changes not previously reported by the insider on Form 3 or Form 4.  Form 5, if required, must be filed within 45 days after the end of the issuer’s fiscal year.

Form S-1 – A “Registration Statement” under the Securities Act of 1933 that a company files with the SEC to register its stock for sale.  Form S-1 is generally the form used by a private company that is “going public.”  It contains the “Prospectus,” along with a number of exhibits and other information about the company.  The SEC staff reviews the Form S-1 and provides comments, which must be resolved with the staff before the public offering can go forward.

Form S-3 – A shorter form of Registration Statement than the Form S-1 that can be used by certain already-public companies to sell additional shares.  It is also the form most often used to cover resale of “Restricted Securities” by selling stockholders.

Form S-8 – A very brief form of Registration Statement filed with the SEC to register shares to be issued under a stock plan.  Does not require filing of the Prospectus.

Grant – The issuance of an award under a stock plan, such as a stock option or shares of restricted stock.

Grant Date –The date on which an option or other award is granted.

Hedging - Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of protecting position in a related security.

Incentive Stock Option (ISO) - An option that has met certain tax requirements entitling the optionee to favorable tax treatment.  Such an option is free from regular tax at the date of grant and the date of exercise (when a non-qualified option would become taxable).  If two holding period tests are met (two years between grant date and sale date and one year between the exercise date and sale date), the profit on the option qualifies as a long-term capital gain rather than ordinary income.  If the holding periods are not met, there has been a “Disqualifying Disposition."

Insider – An officer, director or principal shareholder of a publicly owned company and members of his or her immediate family.  This category may also include other people who obtain nonpublic information about a company and owe a duty not to use it for personal gain.

Legend – A notice on a stock certificate stating that transfer of the shares represented by that certificate is restricted for whatever reason.

Mandatory Holding Period – A period of time after grant, vesting, exercise, or purchase during which the underlying stock cannot be sold.

Non-Qualified Stock Option (NQSO) – An employee stock option not meeting IRS criteria for ISOs (incentive stock options) and therefore triggering a tax upon exercise.  This type of option requires withholding of state and federal income tax, Medicare and FICA/FUTA on the excess of the fair market value over the exercise price on the exercise date.

Non-Section 423 Plan/Non-Qualified Plan – For the purposes of this study, this is any employee stock purchase plan that does not qualify for tax purposes as a Section 423 Plan. (See definition of Section 423 Plan)

Offering Period – The total period of time under an employee stock purchase plan during which employees are authorized to buy stock. The offering period is typically made up of several purchase periods.

Optionee – A person who has been granted a stock option.

Option Price – See “Exercise Price” above.

Performance Units – Grants of dollar-denominated units whose value is contingent on performance against predetermined objectives over a multi-year period of time.  Actual payouts may be in cash or stock.

Performance Shares – Grants of actual shares of stock or “phantom stock” whose payment is contingent on performance as measured against predetermined objectives over a multi-year period of time; same as performance units except that the value paid fluctuates with stock price changes as well as performance against objectives. Payout may be settled in cash or stock.

Phantom Stock Award – A type of incentive grant in which the recipient is not issued actual shares of stock on the grant date but receives an account credited with certain number of hypothetical shares.  The value of the account increases or decreases over time based on the appreciation or depreciation of the stock price and the crediting of phantom dividends. Payout may be settled in cash or stock.

Purchase Period – Under an employee stock purchase plan, this is the period of time over which payroll deductions are made. The accumulated payroll deductions in each purchase period are typically applied to purchase stock at the end of the purchase period.

Reload Option – A replacement stock option granted by some companies to optionees upon a “Stock Swap”.  The number of reload shares granted generally is equal to the number of shares delivered to exercise the option plus, in some cases, any shares withheld for tax withholding obligations.  The exercise price of the new option is the current market price; the reload option generally expires on the same date that the original option would have.

Repricing – The exchange of high-priced, usually “Out-of-the-Money" stock options for lower-priced options.

Restricted Stock Award – Grants of shares of stock subject to restrictions on sale and risk of forfeiture until vested by continued employment.  Restricted stock typically vests in increments over a period of several years.  Dividends or dividend equivalent rights may be paid, and award holders may have voting rights, during the restricted period.

Performance Accelerated Restricted Stock Award Plans (“PARSAPs”), also known as performance-accelerated stock (“PARS”) and time-accelerated restricted stock award plans (“TARSAPs”) – Grants of restricted stock or restricted stock units which may vest early upon attainment of specified performance objectives.  Otherwise, a time-vesting schedule would remain in effect.

Section 423 Plan – A type of employee stock purchase plan (named after the applicable tax code section governing this type of plan), approved by shareholders, that enables employees to purchase stock and not have taxable income until they dispose of the shares after a required holding period.

Shares Outstanding – The number of company shares currently held by shareholders, as tracked by the transfer agent.

Single Trigger – A typical single trigger enables an executive to be paid upon a change-in-control as long as he or she is not terminated for cause and does not leave as a result of retirement, death, or disability.  This is referred to as a single trigger because once the change-in-control occurs, the executive can choose to resign without any reason and receive full severance payments and benefits.

Stock Appreciation Right (SAR) – A contractual right, often granted in tandem with an option, that allows an individual to receive cash or stock of a value equal to the appreciation of the stock from the grant date to the date the SAR is exercised.

Stock Option – A contractual right granted by the company, generally under a stock option plan, to purchase a specified number of shares of the company’s stock at a specified price (the exercise price) for a specified period of time (generally five or ten years).  Assuming the exercise price is the same as the market price of a share of the company’s stock on the grant date, the option will become more valuable if the market price goes up, because the option effectively gives the optionee the right to buy the stock in the future at a discount.  This definition describes an “employee stock option,” as distinguished from a “listed” or “exchange-traded” option.

• Incentive Stock Options (ISOs) – See above.

• Non-Qualified Stock Options (NQOs) – See above.

• Reload Stock Options – See above.

• Performance Stock Options – (performance accelerated vesting, performance contingent vesting) – Options that have some aspect of their vesting or exercise price subject to specified performance criteria (e.g., attaining a specified stock price).  Options with performance vesting provisions generally become exercisable at or near the end of the option term, regardless of performance, to secure favorable accounting treatment; some options, however, will only vest if performance criteria are met (contingent vesting).

• Premium Stock Options – Options that have an exercise price above market value at the time of grant.

• Discount Stock Options – Just the opposite of premium options, having an exercise price below market value at the time of the grant.  Often used when cash compensation is to be deferred by converting it into stock options.

• Indexed Stock Options – Options that have an exercise price which may fluctuate above or below market value at grant, depending on the company’s stock price performance relative to a specified index or the movement of the index itself.  Indexed options differ from performance options in that the exercise price of indexed options typically remains variable until the option is exercised.

• Transferable Stock Options – Options that provide by their terms that they may be transferred by the optionee, generally only to a family member or to a trust, limited partnership or other entity for the benefit of family members, and sometimes to a charity.

• Treasury Stock – Shares of the company’s stock that have been repurchased or otherwise reacquired by the company and are said to be “held in treasury.”  Whether the treasury shares count as “issued” or as “outstanding” shares of the company is a matter of state corporate law.  Generally, a company may not vote its own shares held in treasury.

Vesting Schedule – Schedule setting forth when, and to what extent, options become exercisable or restricted stock or stock units are no longer subject to forfeiture.  Cliff vesting means the option grant vests at one installment.  Graded vesting means options vest in multiple installments over time (for example, 20% per year over five years).