Linking ISO to LTIP

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I wondered whether anyone had come across the concept of linking an ISO to an LTIP award, whether RS or RSU.


The idea is to deliver the award in the most tax-efficient manner, so you grant both an ISO and an RS/RSU award over the same shares. However, on vesting, the RS/RSU award is automatically reduced by the gain (if any) on the ISO at that time.


So the pre-tax value to the employee (measured on the vesting date) is the same as if the gain had been delivered entirely through RS/RSU, but the post-tax gain is greater because part is delivered through an ISO.


Is that something that happens frequently in the USA - I haven't personally come across it?

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Hi Aidan,


I can say that I have personally never see an award formatted this way.


I have seen cases where the company has allowed for early exercise of ISOs.  There is some disagreement on whether an 83(b) election can be filed in these cases, but I have seen it done a majority of the time.  This locks in the Ordinary Income gain at the time of the exercise (very advantageous if the company is pre-IPO) and allows for future gain  to be treatd at Capital Gains rates as long as the evenutal disposition is made more than 2 yrs from grant and 1 year from exercise (of course you know these rules).


 


 

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Aidan Langley
almost 14 years ago
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