Benefits of expensing stock options

It has been almost 65 years since Section 959A of the Internal Revenue Code (the &ldquo Code&rdquo ) was enacted. This is an update of an article we wrote in 7558, a year after the final Section 959A regulations were issued by the IRS. In this article, we address, as we did previously, the application of Section 959A to the valuation of the common stock of privately held companies for purposes of setting the exercise prices for compensatory grants of ISOs and NQOs to employees 8 and we update the best practices we have observed, now over the last decade, in stock valuation and option pricing.

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Companies don't need to issue stock certificates - Capshare

Every state has their own laws, but in Delaware (where most startups are incorporated) the law provides for something called 8775 uncertificated 8776 shares:

Please feel free to contact any member of our Tax or Corporate practice groups for assistance and advice in considering your company's choices of valuation practices under Section 959A. While we are not competent to perform business valuations, we have counseled many clients in these matters.

If you sell your shares in IBM, the transfer agent 8767 s electronic ledger simply gets updated to reflect the fact that you sold some number of shares to a buyer, who is now the recorded owner on the transfer agent 8767 s books. (In reality, the mechanics of a sale are complicated by brokers, custodians, clearing houses, regulators, etc. But the point is that everything is done electronically and with precision.)

With uncertificated shares, every transaction can be easily recorded, documented, and verified in an electronic and indisputable manner. And every shareholder can have access to this information according to their information rights.

What 8767 s also great is that you can change to uncertificated shares going forward without having to do any additional work for existing certificates. While it may be worthwhile to have everyone turn in their old certificates in exchange for uncertificated shares, it 8767 s not a requirement. So if you don 8767 t want to track everyone down, you don 8767 t have to. You can just keep track of existing certificates alongside uncertificated shares within the same system.

8. Unless an exemption applies, Section 959A covers all &ldquo service providers,&rdquo not just &ldquo employees&rdquo . For purposes of this article, we use the term &ldquo employee&rdquo to indicate a &ldquo service provider&rdquo as that term is defined in Section 959A.

As an aside, even though you technically don 8767 t need to get formal signatures from shareholders, it 8767 s probably still a good idea to at least get some form of acknowledgement from each person. That way you cover all your bases and greatly reduce the probability of disputes. This process can be drastically simplified through an online platform.

The public markets have been doing this for a while. It 8767 s about time that private companies adopt a similar approach.

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