The Stock Plan Administration Glossary (A-D)

0-9

10b5-1 Trading Plan: An SEC rule that allows insiders of public companies to establish a pre-arranged trading plan for selling or buying company stock. A Rule 10b5-1 plan specifies in advance the dates, prices, or amounts of trades, providing an affirmative defense against insider trading accusations (the insider must adopt the plan in good faith while not aware of material nonpublic information). These plans enable executives to regularly sell shares (for example, exercising options and selling stock) during blackout periods, as long as the trades follow the predetermined schedule and criteria in the plan.

Section 83(b) Election: A tax election under the Internal Revenue Code (IRC) §83(b) that allows a recipient of restricted stock (stock subject to vesting) to choose to pay income taxes on the total fair market value (FMV) of the stock at the time of grant, rather than paying taxes as the stock vests. By filing an 83(b) election within 30 days of the grant, the individual includes the current value of the stock in income early (often minimal if the company is a startup), which means that any future increase in value is not taxed as ordinary income upon vesting. This can result in lower taxes overall if the stock’s value grows significantly (future gains may qualify as capital gains). However, if the stock never vests or declines in value, the taxes paid upfront cannot be refunded. Example: A startup founder receives restricted stock worth $0.01 per share; by filing an 83(b), they pay tax on that low value now and will have no ordinary income at vesting – any gain on sale is capital gain. (Note: An 83(b) election is not applicable to standard stock options, only to stock that is owned outright subject to vesting.)

Section 162(m): A section of the U.S. tax code that limits the corporate tax deduction for compensation paid to certain top executives of public companies. Under §162(m), a company can generally deduct only up to $1 million of compensation per year for each “covered” executive (CEO, CFO, and the next three highest-paid officers). Prior to 2018, there was an exemption for performance-based compensation (allowing deductions for stock options and other performance awards), but the tax law changed and most equity compensation for covered executives now counts toward the $1 million cap. Section 162(m) is mainly a consideration for plan design and proxy disclosures, ensuring companies are aware that excessive executive payouts (including from stock plans) may not be fully tax-deductible.

Section 280G (Golden Parachute Payments): The IRC provision that governs “golden parachute” payments—typically large sums (severance, accelerated vesting, bonuses) to certain executives triggered by a change in control (e.g. an acquisition). If total change-in-control payments to an applicable executive exceed a threshold (3× the executive’s recent average compensation), Section 280G labels the excess as an “excess parachute payment,” which is not tax-deductible for the company and triggers a 20% excise tax for the executive. Equity awards can contribute to parachute payments (for instance, accelerated vesting of stock options or RSUs upon a merger counts at fair value). Companies may include provisions to mitigate 280G effects (such as capping payouts or seeking shareholder approval for private companies). Golden Parachute Example: If an executive’s average annual pay is $1 million, any change-in-control benefits above $3 million could invoke 280G; the excess portion would incur a 20% excise tax and lose corporate tax deductibility.

Section 409A: The section of the IRC that regulates nonqualified deferred compensation. Enacted to prevent tax abuses, IRC 409A imposes strict timing rules on deferred comp arrangements – including certain stock-based awards. In the equity context, stock options must meet specific conditions to be exempt from 409A: for example, the option exercise price must be at least equal to the stock’s FMV on grant date. If an option is granted with a discount (exercise price below FMV) or has other deferred features, it could be treated as deferred compensation under 409A, risking penalty taxes. 409A valuation refers to the independent appraisal private companies obtain to establish FMV of their common stock for option pricing. Failure to comply with 409A (e.g. allowing an in-the-money option without 409A exemption) results in severe consequences: the compensation is taxed immediately (even if not exercised/paid out yet) plus a 20% additional tax and interest. In summary, Section 409A compliance is crucial in stock plan design to avoid adverse tax results.

Section 423 Plan (ESPP): The tax-qualified Employee Stock Purchase Plan defined in IRC §423. A Section 423 ESPP allows employees to purchase company stock, typically at a discount (up to 15%), with favorable tax treatment on the discount if certain rules are met. Under a qualified ESPP: only employees of the company (and parents/subsidiaries) may participate; all eligible employees are offered the plan on equal terms; the discount cannot exceed 15% of FMV; and annual purchases per employee are capped at $25,000 worth of stock (valued at grant). If the acquired shares are held for at least 2 years from the offering (grant) date and 1 year from the purchase date, any profit on sale is treated as capital gain (a qualifying disposition); otherwise, a portion of the gain (the discount at purchase) is taxed as ordinary income (disqualifying disposition). In practice, most U.S. broad-based ESPPs are Section 423 plans to leverage these tax advantages.

Section 6039 Reporting: A tax reporting requirement related to stock plan transactions. Under IRC §6039, companies must furnish annual information statements to employees (and file with the IRS) for two types of events: (1) the exercise of an ISO, and (2) the first transfer of legal title of shares acquired under a Section 423 ESPP. The IRS has specific forms for this: Form 3921 for ISO exercises, and Form 3922 for ESPP share transfers. These forms report details like the grant date, exercise/purchase date, FMV at exercise, the number of shares, etc., to help employees and the IRS track potential taxable events (e.g. determining if an ISO sale was a qualifying or disqualifying disposition). Companies must deliver the employee statements by January 31 and file with the IRS by the end of February (paper) or March (electronic) following the year of the transaction.

A

Acceleration (Accelerated Vesting): The speeding up of a vesting schedule for an equity award. If an award has accelerated vesting, it means some or all of the unvested portions become vested earlier than originally scheduled, often upon a specific event. Two common types are single-trigger acceleration and double-trigger acceleration. Single-trigger acceleration occurs upon a single event, such as a change in control of the company (e.g. an acquisition might cause all unvested options to vest immediately at closing). Double-trigger acceleration requires two events – typically a change in control and a qualifying termination of the employee (for instance, if the company is acquired and the employee is involuntarily terminated within 12 months, then unvested awards vest). These provisions protect employees by ensuring they aren’t deprived of unvested equity if the company is sold. Acceleration can be full (100% vesting) or partial (e.g. an extra year of vesting). Companies must balance the benefits of acceleration (talent retention, fairness in a takeover) with the potential cost or 280G “parachute” tax issues for large accelerations.

ASC 718 (FASB ASC Topic 718): The U.S. accounting standard for stock-based compensation, titled Compensation – Stock Compensation. Often just called “ASC 718,” it provides guidance on how companies must measure and recognize compensation expense for equity awards (and similar instruments) given to employees and directors. Under ASC 718, companies calculate the grant date fair value of stock options, restricted stock units, and other share-based awards, and then recognize that value as an expense in the income statement over the period the employee must work to earn the award (the vesting period). (For example, if an employee receives stock options worth $50,000 that vest over 4 years, the company will recognize $12,500 of expense per year.) ASC 718 requires use of option pricing models (like the Black-Scholes model or Monte Carlo simulations for market-conditioned awards) to estimate fair value, and it covers accounting for modifications, forfeitures, tax effects, etc. It was introduced in 2005 (as FAS 123(R)) and codified as ASC 718 in 2009. Compliance with ASC 718 is mandatory for U.S. public companies and many private companies, affecting financial statements and EPS calculations.

Authorized Shares: The maximum number of shares of stock that a corporation is legally permitted to issue. This number is set in the company’s articles of incorporation (or charter) and can be changed only by shareholder approval. Authorized shares represent the “ceiling” of potential issued shares. Not all authorized shares are issued initially; many companies authorize more shares than are actually outstanding to leave room for future issuance (such as shares for stock plans, future financing, etc.). Shares that have been issued and are held by shareholders are called outstanding shares. The number of outstanding shares will always be less than or equal to the authorized shares. The difference (authorized minus outstanding) includes shares that are unissued or reserved for specific purposes (for example, a block reserved for an equity compensation plan). Example: A startup’s charter authorizes 10 million shares; initially 5 million are issued to founders/investors (outstanding). The remaining 5 million can later be issued – e.g. 1 million reserved for the option pool, and 4 million available for new investment rounds.

Award (Equity Award): A broad term referring to any stock-based compensation grant made under an equity plan. An award can be an option, an RSU, an RSA, a SAR, a PSU, etc. Essentially, if an employee or service provider receives a right or actual shares through a stock plan, that grant is an “award.” The term is used in plan documents to encompass all types of incentives (e.g., “Awards under the Plan may be in the form of Non-Qualified Stock Options, Incentive Stock Options, Restricted Stock, Restricted Stock Units, and other stock-based awards”). Each award is usually documented by an award agreement outlining its specific terms (grant date, number of shares, exercise price, vesting schedule, etc.).

B

Black-Scholes Model: A widely used mathematical model for pricing stock options. Also known as the Black-Scholes-Merton model, it produces a theoretical fair value of an option based on several inputs: the current stock price, the option’s exercise (strike) price, time to expiration, expected stock volatility, risk-free interest rate, and expected dividends   . Companies use Black-Scholes to estimate the grant date fair value of employee stock options for accounting under ASC 718, and investors use it to gauge the value of traded options. The model assumes the stock’s returns follow a lognormal distribution and that the option can only be exercised at expiration (European-style assumption). Despite its assumptions, it’s a standard tool due to its simplicity. Key point: The Black-Scholes formula shows that higher volatility or a longer time to expiration increases an option’s value (and a higher dividend yield or interest rate decreases it). For employee options which are not traded, companies still rely on Black-Scholes (or similar models) to determine compensation expense.

Blackout Period: A window of time during which certain individuals (typically insiders such as executives, directors, and other employees with access to sensitive information) are prohibited from trading the company’s stock. Companies impose blackout periods, often leading up to earnings releases or major announcements, to prevent trades while insiders possess material nonpublic information. For example, a company might have a quarterly blackout from the last two weeks of a quarter until 48 hours after earnings release. During this time, insiders cannot buy or sell company shares (nor exercise stock options if it involves an immediate sale) except through pre-established 10b5-1 plans. Blackout periods reduce the risk of insider trading violations and help demonstrate fair market practices. (Note: “Blackout period” can also refer to a temporary freeze on plan transactions, such as when changing 401(k) or ESPP providers, but in equity comp context it usually means trading blackouts.)

Board Approval (of Equity Plans/Awards): Corporate boards of directors play a key role in stock plan administration. The board (or a designated Compensation Committee of the board) must approve the adoption of equity compensation plans and typically approve all equity grants (or delegate grant authority within set parameters). Board approval is required to authorize the total number of shares in a plan (often also needing shareholder approval for public companies or for ISO plans). When grants are made, the board or committee approves the list of awards (grantees, amounts, exercise prices, etc.), establishing the grant date. This governance ensures that equity awards are issued in accordance with the company’s plan and fiduciary duties. In practice, companies prepare grant recommendations (for new hires, bonus grants, etc.) and the committee meets to review and approve them, ensuring no grants are backdated or made outside authorized pools. Board oversight maintains the integrity and compliance of stock plans.

Burn Rate (Run Rate): In stock plan context, “burn rate” refers to the annual rate at which a company uses available shares for equity compensation. It is a measure of how quickly the share reserve is being “burned” through grants. Burn rate is typically calculated as: (Number of shares granted in a year) ÷ (Weighted average outstanding shares). For example, if a company with 100 million shares outstanding grants 2 million shares worth of options/RSUs in a year, its burn rate is 2%. A high burn rate means the company is doling out equity aggressively, which can lead to higher dilution for shareholders if sustained over time. Institutional investors and proxy advisory firms monitor burn rates and may have guidelines (e.g., burn rate should be below a certain industry percentile) before approving additional share authorizations. Burn rate can also be expressed over multiple years or as an average to smooth out spikes from one-time grants.

C

Capital Gains Tax: The tax on profit from the sale of a capital asset (such as stock) when the selling price exceeds the purchase price (basis). In the U.S., capital gains tax rates are typically lower than ordinary income tax rates if the asset was held for the long-term (more than one year). For equity compensation, this is relevant when an employee sells shares acquired through stock plans. If the shares were held long enough – e.g. ISO shares in a qualifying disposition or ESPP shares meeting holding periods – the profit is a long-term capital gain, taxed at 0%/15%/20% depending on income level, rather than as salary income   . Short-term holdings (one year or less) are taxed at ordinary income rates. Capital gains tax also depends on the holding period of the stock after exercise or purchase. (In some contexts, “Capital Gains Tax” can refer specifically to the tax regime on investment gains – for instance, the UK uses the term CGT. In any case, it’s the tax on the increase in value of stock between buy and sell.)     

Capitalization Table (Cap Table): A spreadsheet or table that details a company’s equity ownership structure. The cap table lists all the securities that make up the company’s capital (such as common shares, preferred shares, stock options, warrants, etc.) and who owns them      . It typically shows each shareholder or option holder, the number of shares or options they hold, and their percentage ownership on a fully diluted basis. Cap tables are essential in stock plan administration to track the pool of shares reserved for the equity plan, how much has been granted, and what remains available. For startups, the cap table helps illustrate ownership stakes through various funding rounds (founders, investors, employee option pool). A well-maintained cap table will reflect exercises, cancellations, new grants, and any stock splits. It’s a critical tool for understanding dilution: for example, if new shares are issued, the cap table shows how each existing stakeholder’s percentage is affected.

Change in Control (CIC): A term in stock plans denoting a major change in ownership or leadership of a company, typically through a merger, acquisition, consolidation, or sale of substantially all assets. The exact definition of “Change in Control” is outlined in the plan or award agreement (for instance, acquiring more than 50% of the company’s stock, or a merger after which the original shareholders own less than a certain percentage of the new company). CIC is significant because it often triggers special treatment of equity awards. Many plans have acceleration clauses or provisions for assumption or cash-out of awards upon a CIC. For example, on a CIC, unvested awards might fully vest (single-trigger) or vest if the employee is later terminated (double-trigger). In an acquisition, the acquirer might replace existing awards with equivalent new awards in the combined company (award assumption). CIC clauses aim to protect employees and optionholders during takeover events, while also giving the acquiring company flexibility in handling the target’s stock plans. Note: CIC events can implicate 280G “golden parachute” calculations if acceleration is involved, as discussed in that entry.

Cliff Vesting: A type of vesting schedule where no vesting happens until a specific cliff date, at which point a large portion (often 100%) of the award vests all at once. A typical example is a “1-year cliff” on a four-year option grant – nothing vests for the first 12 months, then 25% vests at the one-year mark, and after that it might continue to vest monthly or quarterly. Some plans use a full cliff, e.g. restricted stock that vests entirely after three years of service (3-year cliff). Cliff vesting contrasts with graded vesting (partial vesting in stages over time). The initial cliff is common for new-hire option grants: it encourages at least one year of retention. After the cliff, usually the remaining vesting occurs periodically. Example: If an RSU grant has a 3-year cliff, the employee must stay a full 36 months to receive any shares; leaving before then means they get nothing.

Clawback: A contractual provision that allows a company to “take back” compensation that has already been paid out to an employee, usually under specific conditions. In equity compensation, a clawback clause might require an executive to return proceeds from stock sales or forfeit gains from options if certain events occur – for example, if a financial restatement shows performance targets weren’t actually met, or if the person engaged in misconduct or violated a non-compete. Clawbacks have become more common, especially for executives, as a governance tool. For instance, U.S. public companies (under Dodd-Frank Act rules) must implement clawback policies to recoup incentive pay (including equity) if it was based on erroneous financials that later get restated. A clawback is essentially a form of risk-sharing: it assures shareholders that if pay was unjustified (due to error or wrongdoing), the company can recover it. Example: An executive was awarded performance-based RSUs that vested because the company hit earnings targets. If those earnings are later found to be overstated, a clawback policy might require the exec to return the value of those RSUs (or shares) to the company.

Commission (SEC) Rule 701: See Rule 701 in the “R” section of this glossary.

Compensation Committee: A committee of the Board of Directors, typically composed of independent directors, responsible for overseeing executive compensation and the company’s equity plans. The Compensation Committee (often nicknamed “Comp Committee”) approves grants of stock options and other awards, sets performance goals for equity incentives, and ensures the plan is administered according to its terms and shareholders’ interests. In public companies, this committee’s actions are disclosed in the proxy statement. While not an “equity term” per se, it’s important in stock plan administration because most equity grants must be authorized by the Comp Committee.

Covered Employee: In the context of Section 162(m) (see “Section 162(m)” entry), a “Covered Employee” generally refers to an executive whose compensation is subject to the $1 million deductibility cap (e.g. the CEO, CFO, and top 3 other officers of a public company). This term matters for identifying whose pay (including equity pay like vesting of RSUs or option exercises) might not be deductible if it exceeds $1 million. Post-2017 tax reform, once someone is a covered employee, they remain so permanently for 162(m) purposes.

D

Dilution: In equity terms, dilution refers to the reduction in existing shareholders’ ownership percentage that occurs when new shares are issued. When a company grants stock options or other equity awards, exercising or settling those awards will typically increase the number of shares outstanding, thereby “diluting” existing ownership. Dilution can be measured in terms of earnings per share impact or voting power. For example, if an investor owned 100 shares out of 1,000 (10% ownership) and the company issues 100 new shares to employees exercising options, that investor now owns 100 out of 1,100 shares (~9.1%). Overhang and burn rate are related concepts that quantify potential and actual dilution from equity plans. Companies monitor dilution levels – for instance, institutional investors may be concerned if the total potential dilution (all outstanding awards + remaining pool) is, say, 20% or more of the outstanding shares. Managing dilution involves balancing the need to grant equity for compensation against the shareholder impact of issuing new shares.

Disqualifying Disposition: A tax term associated with Incentive Stock Options (ISOs) and qualified ESPPs. A disqualifying disposition occurs when an ISO-acquired stock or ESPP stock is sold before satisfying the required holding period (which is not meeting the qualifying disposition criteria). For ISOs, the employee must hold the stock at least 2 years from grant and 1 year from exercise. If they sell earlier, it’s “disqualifying” – the favorable ISO tax treatment is lost, and the bargain element (the spread at exercise) becomes taxable as ordinary income   . Similarly, for Section 423 ESPPs, selling the stock before 2 years from offering or 1 year from purchase is a disqualifying disposition, causing the purchase discount to be taxed as ordinary income. Example: An employee exercises ISOs on January 1, 2025 and sells the shares on August 1, 2025 (only 7 months later). That sale is a disqualifying disposition: the employee must report the difference between the exercise price and the market price at exercise as wage income (and the company can deduct that amount, unlike a qualifying disposition). Any further gain beyond the exercise-date price is a capital gain (short-term, since the holding period was under a year).

Dividend Equivalent (Right): A feature sometimes attached to equity awards, typically RSUs or phantom stock, where the award holder is entitled to compensation equal to the dividends that would have been paid on the underlying shares during the vesting period. Dividend equivalents are usually paid in cash or additional shares when actual shareholders get dividends. For instance, if an executive has 1,000 unvested RSUs and the company pays a dividend of $0.50 per share, the executive might accrue a $500 dividend equivalent (or an equivalent in shares) that is paid out when the RSUs vest. This keeps the RSU holder economically whole as if they owned the shares during vesting. Dividend equivalents on unvested awards are typically subject to the same vesting and tax timing as the underlying award – if the RSUs are forfeited, the accumulated dividend equivalents are too. (Not all companies offer dividend equivalents, but they are common with RSUs at companies that pay regular dividends, and are often mandated to be deferred until vest to avoid 409A issues.)