A Guide To Stock Comp Abbreviations

As if texting shorthand wasn’t complicated sufficient (IKR?), when you will have inventory choices, restricted inventory items, or an worker inventory buy plan, you might be plunged into an alphabet soup of initialisms, acronyms, and jargon. Are you aware NQSOs from ISOs? AMT from FICA or NIIT? What’s the FMV at choice train? Are you able to promote firm inventory when MNPI? What’s the cope with RSUs, PSUs, ESPPs, and SARs?

With just a little observe, it’s simple to turn out to be proficient in these abbreviations—and BTW, given how lengthy and cumbersome a few of the underlying phrases are, you’ll quickly study to understand them. Furthermore, studying these abbreviations is an efficient technique to turn out to be accustomed to a few of the key options and particulars of inventory compensation. This text gives a helpful information, organized by matter.

WYSIWYG: Sorts Of Grants

SBC: stock-based compensation, pay that includes firm inventory slightly than money.

ESO: worker inventory choice, a proper that an organization awards to buy a selected variety of its shares for a specified worth (train worth) and interval (typically as much as 10 years). Worker inventory choices are totally different from listed or exchange-traded choices.

NQSO or NSO: nonqualified inventory choice, the essential and commonest sort of ESO. NQSOs don’t qualify for particular tax remedy below the Inner Income Code (IRC).

ISO: incentive inventory choice, the opposite main sort of inventory choice. An incentive inventory choice is a sort of ESO that qualifies for particular tax remedy below the IRC if sure necessities and holding durations are met.

RSU: restricted inventory unit, the commonest sort of fairness award these days in public corporations. A grant of RSUs is a promise to challenge you a set variety of shares after you’ve met the associated vesting circumstances, often a specified interval of continued employment or companies to your firm.

PSU: efficiency share unit, a grant of shares that vests or pays out primarily based on efficiency slightly than simply continued employment. Efficiency-based grants will be within the type of efficiency inventory awards (PSAs), that are much like restricted inventory, or efficiency inventory items (PSUs), that are much like RSUs. The commonest efficiency objective metrics are whole shareholder return (TSR) and relative whole shareholder return (rTSR).

ESPP: worker inventory buy plan, a sort of broad-based inventory plan that allows workers to make use of payroll deductions amassed over a purchase order interval (e.g. one, three, six, twelve months) to accumulate inventory from the corporate, typically at a reduction or not less than with out fee.

SAR: inventory appreciation proper, a contractual proper that allows you to obtain money or inventory equal in worth to the appreciation of a specified variety of firm shares between the grant date and the train date. The taxation of SARs is much like that of NQSOs.

LTI: long-term incentive, a proper identify for inventory and money compensation that’s earned primarily based on a time horizon, efficiency objective, or vesting interval of multiple 12 months, against this with short-term incentives (e.g. an annual money bonus).

OMG: Taxes

OI: atypical revenue. Wage, wages, curiosity, and kinds of revenue taxed at atypical tax charges. Most types of inventory compensation generate atypical revenue, and tax withholding applies.

CG: capital achieve, revenue that arises from the sale of a capital asset, such because the sale of shares acquired out of your fairness comp. Capital positive factors and losses could also be short-term (held 12 months or much less) or long-term (held longer than 12 months). Quick-term capital positive factors (STCG) are taxed on the charges of atypical revenue. Lengthy-term capital positive factors (LTCG) are taxed at 0%, 15%, or 20%, relying in your taxable revenue throughout the 12 months.

AMT: different minimal tax. The choice minimal tax system runs parallel to atypical revenue tax. Beneath the AMT system, your different minimal taxable revenue (AMTI) is analogous in idea to adjusted gross revenue (AGI) for atypical revenue tax. Whenever you train ISOs and maintain the shares past the calendar 12 months of train, the unfold is a part of your AMTI and you may set off the AMT, relying on quite a lot of different components.

FICA: Federal Insurance coverage Contributions Act. Collectively, Social Safety and Medicare taxes are known as FICA taxes as a result of they’re collected below the authority of the Federal Insurance coverage Contributions Act. You understand them out of your paycheck and the Kind W-2 you employ to your tax returns. FICA taxes, additionally know because the federal payroll taxes, apply if you train NQSOs or SARs and on the vesting of restricted inventory and RSUs.

FMV: honest market worth. The FMV of an organization’s inventory is used to find out the quantity of taxable revenue to report for an train of NQSOs and SARs and for the vesting of restricted inventory/RSUs. The FMV can be used to set the train worth of inventory choices on the grant date.

IRC: The Inner Income Code, probably probably the most complicated tax system in human historical past, is the physique of laws that governs all federal taxation in the US, together with the taxes that apply to inventory compensation. For instance, IRC Part 422 governs the taxation of ISOs, whereas Part 423 units the foundations for tax-qualified ESPPs.

NIIT: Web Funding Revenue Tax, a 3.8% Medicare surtax on funding revenue, similar to capital positive factors and dividends, when your revenue is over specified threshold quantities. This additional 3.8% tax applies on high of the same old capital positive factors tax (15% or 20%, relying on revenue) for taxpayers with yearly modified adjusted gross revenue (MAGI) of greater than $200,000 (greater than $250,000 for married joint filers).

FITW: federal income-tax withholding, which applies on the train of NQSOs and SARs and the vesting of restricted inventory and RSUs.

QSBS: Certified Small Enterprise Inventory. Inventory in a startup firm that enables you, below sure circumstances, to promote shares held greater than 5 years at a 0% capital positive factors price. There are detailed guidelines that decide whether or not the brand new firm’s inventory, and your inventory, is QSBS.

SRF: substantial danger of forfeiture, a tax time period that applies when rights to compensation are conditioned upon future companies (e.g. working X years for a corporation) or sure targets (e.g. reaching a efficiency objective or inventory worth). If the situation will not be happy, the inventory is forfeited. Within the context of restricted inventory and RSUs, revenue will not be acknowledged whereas the inventory continues to be topic to danger of forfeiture (i.e. should vest).

BTW: Different Abbreviations

PTEP: post-termination train interval, the size of time it’s important to train inventory choices after your employment on the firm ends. This era is nearly all the time shorter than the time period that might stay in case your employment had continued. It often lasts 90 days from the termination date, however it may be a lot much less, and for those who miss the train window you can not get the choices again. See your inventory plan and grant settlement for particulars, together with what occurs with a depart of absence (LOA).

BSM: Black-Scholes mannequin, a fancy mathematical formulation used to calculate the theoretical current worth of a inventory choice utilizing variables similar to inventory worth, train worth, volatility, and anticipated choice time period (i.e. the time till train). Black-Scholes is the option-valuation mannequin mostly utilized in accounting for inventory choices and in sure financial-planning instruments.

CIC: change in management. This denotes a merger or acquisition or different substantial change in shareholder possession of an organization. A change in management can set off the acceleration of vesting in inventory choices, restricted inventory, and RSUs. The specifics of what constitutes a change in management and its impression are outlined in your organization’s inventory plan paperwork.

SDS: same-day sale. In this sort of choice train, the rapid sale of the underlying shares from the train generates the proceeds to pay the train worth and any tax withholding. That is additionally known as a cashless train.

STC: sell-to-cover. In this sort of choice train you promote simply sufficient of the inventory to “cowl” the entire train prices (train worth + taxes), with the remaining inventory held. With restricted inventory/RSUs, this is applicable to promoting shares at vesting to cowl the tax withholding.

GTC: good-till-canceled order. That is an order to promote inventory related to an train when the inventory reaches a selected worth whereas the order stays open. To forestall gross sales of its inventory from occurring exterior approved buying and selling home windows, some corporations don’t enable this.

IPO: preliminary public providing, the method by which a privately held firm first presents its shares to the investing public, often by means of a registration assertion below the securities legal guidelines. An IPO is what brings a personal firm into the inventory market as a public firm.

SEC: Securities and Change Fee, the US federal authorities company chargeable for the supervision and regulation of the securities business, the inventory markets, securities choices, and the continuing disclosure obligations of public corporations in the US. SEC guidelines and laws have an effect on many elements of fairness compensation and inventory possession.

MNPI: materials nonpublic data, confidential data that can transfer the corporate’s inventory worth (whether or not up or down) when it’s made public. Shopping for or promoting inventory when materials nonpublic data is insider buying and selling, which is illegitimate, together with insider tipping. To keep away from stepping into bother for insider buying and selling, chorus from buying and selling firm inventory when MNPI.

GTK: Additional Assets

Hopefully the wealth your fairness comp or ESPP creates will provide you with a number of WAFF. A full glossary of inventory compensation phrases, that includes detailed definitions, is on the market at myStockOptions.com, a useful resource on all elements of inventory comp and the associated monetary and tax planning.

The glossary can be obtainable as a smartphone app: Inventory Compensation Glossary, obtainable free from the App Retailer (Apple units) and from Google Play. It features a “time period of the day” and a helpful quiz. The myStockOptions web site additionally has an interactive quiz on inventory comp abbreviations the place you possibly can check your data.