ECA CEP Level 1 Glossary

Alternative Minimum Tax (AMT) In general

"Alternative" method of computing federal income tax that recaptures certain preferences and adjustments that are otherwise excluded from gross income.

Tax Offset Bonus

A cash bonus payable to an employee upon the exercise of a nonqualified stock option to cover, or "offset," the withholding taxes due as a result of the exercise. Generally, the amount of the bonus will be based upon a percentage of the total amount of compensation income recognized by the optionee plus additional amounts needed to "gross up" the bonus to fully offset the tax effect of the transaction on an after-tax basis. For financial reporting purposes, the use of a tax offset bonus to reimburse an employee for the withholding taxes due on the exercise of a nonqualified stock option will result in "variable" accounting treatment for the transaction. That is, the corporation will record a compensation expense for financial reporting purposes equal to the amount of the cash bonus plus the entire difference between the option price and the fair market value of the corporation's stock on the date of exercise.

Stock Split

A change in the capitalization of an issuer that increases or decreases the number of securities outstanding, and adjusts the value of the securities accordingly, without a corresponding change in the assets or capital of the issuer. Generally, used to denote a change in capitalization that increases the number of securities outstanding and adjusts the value of the securities downward.

Anti-dilution Adjustment

A change to the terms, conditions, and/or price of a security to prevent a diminution in value as the result of a change in the capital structure of a corporation. Typically, an employee stock option plan will provide for an appropriate adjustment in the number and kind of securities subject to the plan and to all outstanding employee stock options in the event of a change in the capitalization of the corporation.

Compensation Committee

A committee of the board of directors that evaluates and approves executive compensation (including equity compensation plans).

Public Company

A company whose stock is publicly traded on a recognized stock exchange; subject to the registration, disclosure, and related rules enforced by the SEC.

Nasdaq

A computerized network showing quotations and transaction information with respect to securities traded in the over-the-counter market which meet the size and trading volume requirements to be quoted on the system. Nasdaq tends to reflect prices for the more active OTC-traded securities.

Stock Option

A contract right granted to an individual to purchase a certain number of shares of stock at a certain price (and subject to certain conditions) over a defined period of time.

Stock Appreciation Right (SAR)/Stock-Settled Stock Appreciation Right (SSAR)

A contractual right granted to an individual that gives the recipient the right to receive a cash amount equal to the appreciation on a specified number of shares of stock over a specified period of time. An SSAR pays out the appreciation in the form of stock rather than cash.

Option/Stock Option

A contractual right granted to an individual to purchase a specified number of shares of stock of the granting corporation at a specified price for a specified period of time. As set forth in the regulations to Section 83 of the Code, the term "option" includes the right or privilege of an individual to purchase stock from a corporation by virtue of an offer of the corporation continuing for a stated period of time, whether or not irrevocable, to sell such stock at a pre-determined price, such individual being under no obligation to purchase. Such a right or privilege, when granted, must be evidenced in writing. The individual who has such right or privilege is referred to as the "optionee."

Officer

A corporate official responsible for managing the day-to-day operations of a corporation. For purposes of Section 16 of the Exchange Act, an issuer's president, principal financial officer, principal accounting officer (or if there is no such accounting officer, the controller), any vicepresident of the issuer in charge of a principal business unit, division or function, any other officer who performs a policy-making function or any other person who performs similar policy-making functions for the issuer.

Subsidiary

A corporation that is majority owned or wholly owned by another corporation. For purposes of the ISO rules, any corporation (other than the employer corporation) in an unbroken chain of corporations beginning with the employer corporation if, at the time of grant of a stock option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

Issuer

A corporation that issues securities.

Parent Corporation

A corporation that owns a controlling interest in the securities of another corporation. For purposes of the ISO rules, any corporation (other than the employer corporation) in an unbroken chain of corporations ending with the employer corporation if, at the time of grant of the employee stock option, each of the corporations other than the employer corporation owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

Privately (or "Closely") Held Company

A corporation the securities of which are not publicly traded.

IPO (Initial Public Offering)

A corporation's first offering of securities to the general public under a registration statement prepared and filed with the Securities and Exchange Commission in accordance with the 1933 Act. The offering must also be made in compliance with the requirements of the securities laws of the various states where the securities will be offered for sale and sold.

Record Date

A date set by the corporation for purposes of determining stock ownership for purposes of voting, dividends, and adjustments resulting from a change in capitalization (for example, a stock split, a stock dividend or a reverse stock split).

Share (or Stock) Certificate

A document that evidences ownership of a specific number of securities of a corporation. The certificate typically contains an alpha-numeric identifier, the name of the issuing corporation, the number of securities represented by the certificate, and the name and address of the shareholder/stockholder.

Stock Certificate

A document that evidences ownership of a specific number of securities of a corporation. The certificate typically contains an alpha-numeric identifier, the name of the issuing corporation, the number of securities represented by the certificate, and the name and address of the shareholder/stockholder.

Par Value

A dollar amount assigned to shares of stock by the corporation's charter documents. It may be used to compute the dollar accounting value of common shares on a corporation's balance sheet. Many corporations issue no-par stock. Par value has no relation to fair market value.

ISO Amount Limitation

A dollar limitation to the amount of stock that can receive preferential tax treatment under an ISO grant. As set forth in Section 422(d) of the Code, to the extent that the aggregate fair market value of the shares of stock with respect to which ISOs are exercisable for the first time by an employee during any calendar year (under all plans of the employee's employer corporation and its parent and subsidiary corporations) exceeds $100,000, such stock options shall be treated as nonqualified stock options to the extent of the amounts in excess of $100,000. For purposes of applying this rule, options are to be taken into account in the order in which they were granted. In addition, for purposes of applying this rule, the fair market value of any shares of stock is to be determined as of the time the ISO with respect to such shares of stock was granted.

Securities Act of 1933 (1933 Act)

A federal statute governing the offer and sale of securities in interstate commerce; prescribes registration, disclosure, and anti-fraud rules

Securities Exchange Act of 1934 (Exchange Act)

A federal statute that requires stock exchanges to register with (or obtain an exemption from) the SEC as a prerequisite to doing business; includes reporting, proxy solicitation, tender offer, and insider trading rules.

Same-Day Sale (or "Broker Same-Day Sale")

A form of cashless exercise of an employee stock option in which an individual sets the sale price with a broker on the exercise date (in the case of options) or the purchase date (in the case of a purchase under a Section 423 plan), has the shares delivered directly to the broker, and, on delivery of the shares, receives payment for the shares sold.

Time-Accelerated Stock Option

A form of employee stock option that provides for a fixed, service-based vesting schedule with certain vesting accelerators tied to the achievement of specified performance criteria. If properly structured, for financial reporting purposes, the amount of compensation expense associated with the stock option is measured at the date of grant. This type of arrangement enables a corporation to grant an employee stock option that, from a practical standpoint, operates as a performance-based award but which receives "fixed" accounting treatment rather than the "variable" accounting treatment that is typically associated with performance-based arrangements.

Time-Accelerated Restricted Stock Award Plan (TARSAP)

A form of restricted stock purchase award that provides for a fixed, service-based vesting schedule with certain vesting accelerators tied to the achievement of specified performance criteria. If properly structured, for financial reporting purposes, the amount of compensation expense associated with the award is measured at the date of grant. This type of arrangement enables a corporation to grant an award that, from a practical standpoint, operates as a performance-based award but which receives "fixed" accounting treatment rather than the "variable" accounting treatment that is typically associated with performance-based arrangements.

Option/Stock Option Plan

A formal program adopted by a corporation, often in writing, that provides for the grant of employee stock options to one or more individuals upon the terms and conditions set forth in the plan document and the issuance of shares of stock of the corporation upon the exercise of such stock options.

Reporting Person

A general term referring to directors, officers, beneficial owners of more than 10% of a class of an issuer's registered equity securities, and any other person otherwise subject to Section 16 of the Exchange Act.

Insider

A general term referring to persons who, by virtue of their positions within a corporation, have access to confidential information about the corporation. Frequently used to denote the directors, officers, beneficial owners of more than 10% of a class of an issuer's registered equity securities, and persons otherwise subject to Section 16 of the Exchange Act.

Employment Tax

A general term used to describe taxes imposed under FICA and FUTA.

Proxy

A grant of authority to vote the securities of another person. Also refers to the person authorized to vote the securities on behalf of another and/ or the written document granting the authority.

Board of Directors

A group of individuals elected by a corporation's shareholders to set the policies and oversee the affairs (but not the day-to-day management) of the corporation.

Institutional Investor

A large non-bank investor, frequently representing an institution such as a finance company, pension fund, or mutual fund.

Corporation

A legal entity that is separate from, and independent of, the persons who formed and/or own the business. A corporation possesses the attributes of (1) limited liability (that is, its shareholders/stockholders are not personally liable for the debts of the corporation), (2) centralized management (that is, responsibility for managing the business and affairs of the corporation resides with designated directors and officers rather than with the owners, the shareholders/stockholders), (3) continuity of life (that is, the corporation has a perpetual existence that is not affected by the death or departure of its shareholders/stockholders), and (4) free transferability of interest (that is, the shareholders/ stockholders have the ability, subject to any contractual limitations, to freely transfer or otherwise dispose of their shares of stock without affecting the corporation's status).

Black-Scholes Option Pricing Model

A mathematical formula used for valuing employee stock options that considers such factors as the volatility of returns on the underlying securities, the risk-free interest rate, the expected dividend rate, the relationship of the option price to the price of the underlying securities, and the expected option life. Developed in 1973 by three economists, the model was originally created to value options traded on European commodity exchanges

Annual Meeting

A meeting of a corporation's directors, officers, and shareholders/stockholders, held for the purpose of communicating the operating and financial results of the business for the prior fiscal year, the corporation's prospects for the future, and major decisions of management, and for deciding matters requiring the approval of the corporation's shareholders/stockholders. Generally, the election of the corporation's board of directors occurs at the annual meeting. Shareholders/stockholders who are not able to physically attend the annual meeting may vote on the election of directors and other matters brought before the meeting by submitting a proxy before the meeting authorizing a third party to vote their shares of stock.

Replacement Grant

A new employee stock option grant that is intended to replace a previously granted stock option, often with terms and conditions that differ in some respect from those contained in the original stock option. Frequently, when an employee stock option is repriced, the transaction will take the form of a cancellation of the original employee stock option and the grant of a new "replacement" stock option.

Revenue Procedure

A notice published by the IRS giving administrative guidance on the application of tax laws; intended to be relied upon by taxpayers.

"Window" Period

A period of time during which, under a corporation's trading policy, it is permissible for a director, officer or employee to trade in the corporation's securities if the individual is in compliance with the terms of the policy (that is, the individual is not in actual possession of material, non-public information concerning the corporation). Typically, these periods run from ten days to two months following the release of quarterly or annual financial information by the corporation.

Named Executive Officer (NEO)

A person who is subject to individual disclosure requirements under Regulation S-K of the Securities Exchange Act of 1934. Named executive officers include the chief executive officer (CEO), chief financial officer (CFO), and three other highest-paid executive officers (ranked on the basis of total compensation). For smaller reporting companies and emerging growth companies, the NEOs include only the CEO and to next two most highly compensated employees.

Shareholder/Stockholder

A person who owns one or more of the outstanding shares of stock of a corporation.

Insider Trading

A person's wrongful use or wrongful communication, whether directly or indirectly, of confidential information to purchase or sell securities.

FASB (Financial Accounting Standards Board)

A private sector organization recognized by the Securities and Exchange Commission as the source for generally accepted accounting principles for corporations that offer and sell securities in the United States.

Form 10-Q

A quarterly report for issuers subject to the reporting requirements of Section 13(a) or 15(d) to the Exchange Act. The report contains information about the business and management of the issuer, and other specified information.

Evergreen Provision

A replenishment feature in a stock plan that automatically increases at regular intervals the number of shares reserved under the plan.

Proxy Solicitation

A request to be empowered to vote the securities of another person. Typically, a corporation will solicit the authority to vote the securities of its shareholders/stockholders at the corporation's annual meeting of shareholders/stockholders.

Private Letter Ruling (PLR)

A ruling issued by the IRS to a specific taxpayer, indicating the IRS interpretation of tax law with respect to a stated set of facts. PLRs include private letter rulings and technical advice memoranda, and are available to the public, although they may not be cited as precedent and do not bind the IRS other than as to the taxpayer requesting the ruling. Other forms of non-precedential IRS rulings include field service memoranda and IRS Chief Counsel Advisory memoranda.

Revenue Ruling

A ruling published by the IRS that states the IRS audit position on the application of the tax law to specific facts; establishes precedent that may be relied upon.

Derivative Security

A security that takes, or "derives," its value from another instrument. For purposes of Section 16 of the Exchange Act, a derivative security includes any option, warrant, convertible security, stock appreciation right or similar right with an exercise or conversion privilege at a price related to an equity security, or similar securities with a value derived from the value of an equity security

National Association of Securities Dealers (NASD)

A self-regulatory organization subject to the Exchange Act, comprised of brokers and dealers in the over-thecounter (OTC) securities market. The NASD was established in the late 1930s to regulate the OTC market. It was incorporated into the Financial Industry Regulatory Authority (FINRA) in 2007.

Financial Industry Regulatory Authority (FINRA)

A self-regulatory organization subject to the Exchange Act, comprising brokers and dealers. Created in 2007 to incorporate oversight of U.S. securities markets into one organization. Among the organizations incorporated was the National Association of Securities Dealers (NASD), which comprised brokers and dealers in the over-the-counter (OTC) securities market

Federal Insurance Contributions Act (FICA)

A series of employment taxes imposed on employees and employers with respect to employee wages, including Social Security and Medicare taxes.

Independent Contractor

A service provider who is not an employee.

Registered Owner

A shareholder who holds shares directly, i.e., whose name is recorded in a security issuer's register as the security's owner (also called the "record holder"). A registered owner is entitled to receive a proxy and cast votes directly with the issuer.

Restricted Stock

A stock grant that is nontransferable until vesting.

Reload Option

A stock option granted to an individual who has exercised an option (typically by a stock swap) that restores the original number of shares under option; the terms of the option (e.g., the price) need not be the same as those of the swapped option.

Discount Stock Option

A stock option granted with an option price that is less than the fair market value of the corporation's stock on the date of grant. By virtue of the requirement under Section 422(b)(4) of the Code that an ISO must have an option price that is not less than the fair market value of the corporation's stock on the date of grant, a discount stock option will necessarily be a nonqualified stock option. Under ASC Topic 718 and ASC Subtopic 505-50 (formerly FAS 123(R)), discounting that is disclosed properly at the time of grant is less of an issue than it was under APB 25. However, undisclosed discounting may raise serious SEC disclosure issues. Discounting in general may cause tax issues under Section 409A of the Code.

Nonapproved Plan

A stock option plan that has not been approved by the shareholders.

NQSO, NSO (Nonstatutory [or Nonqualified] Stock Option)

A stock option that does not satisfy the requirements of a statutory stock option under the Code. The spread (if any) on exercise of an NSO is includable in ordinary income and subject to tax under Section 83 of the Code.

Indexed Stock Option

A stock option with an option price that is periodically adjusted in relation to a market, industry or peer group performance (such as the Standard & Poor's 500). Economically, for the stock option to have value to the optionee, the corporation's stock must outperform the designated performance indicator. While it is possible that the stated option price can be decreased if the designated performance indicator declines over the option term, many employee stock option plans do not permit the option price to drop below the fair market value of the corporation's stock on the date of grant. Since the option price for this type of employee stock option changes over time, for financial reporting purposes it is considered a "variable" award that results in periodic compensation expense until the option price is finally fixed.

Equity Security

A stock or similar security, or a security that is convertible, with or without consideration, into such a security, which security in either case provides an equity interest in the corporation.

Tax Basis

A tax concept representing the actual and constructive "cost" of property to a taxpayer; for purposes of stock purchased under an option, the tax basis is equal to the amount paid on exercise plus any amount included in ordinary income prior to disposition.

Cost Basis (Tax Basis)

A tax concept representing the actual and constructive cost of property to a taxpayer; for purposes of stock purchased under an option, the cost basis is equal to the amount paid on exercise plus any amount included in ordinary income prior to disposition.

Leave of Absence

A temporary, approved absence from employment. For purposes of applying the ISO rules, a leave of absence is not considered an interruption of the employment relationship if the leave is shorter than 91 days or the employee's right to reemployment is guaranteed by statute or contract.

Accredited Investor

A term defined in Rule 501 of Regulation D to classify investors who are financially sophisticated to protect their own interests and have a reduced need for the protection provided by certain public filings

Stock Swap

A transaction in which already owned stock is exchanged in lieu of cash to pay the option price for the exercise of an employee stock option.

Stock Swap Exercise

A transaction in which already-owned shares of stock are exchanged in lieu of cash to pay the option price for the exercise of a stock option.

Pyramid Exercise

A transaction in which an optionee exercises a minimum number of shares of stock underlying an employee stock option for cash and then immediately tenders such shares of stock back to the corporation at their appreciated value to exercise additional shares of stock under the stock option. Through a series of successive stock swaps in this manner, the optionee is able to fully exercise the shares of stock subject to the employee stock option. In this manner, the employee stock option can be fully exercised with a minimum cash investment. This results in the optionee receiving shares of stock with an aggregate value equal to the total amount of appreciation in value inherent in the stock option at the time that the transaction is initiated.

Sale

A transaction involving the disposition of property, such as shares of stock, in exchange for the receipt of consideration for such property.

Change in Control

A transaction that alters the ownership of a corporation, including a merger, consolidation, stock sale, or asset sale. With respect to options, events that constitute a change in control are generally defined in the plan.

Nonreportable Transaction (Section 16)

A transaction that is not required to be reported on either a Form 4 or a Form 5. Note that the effect of a nonreportable transaction on an insider's holdings should be reflected on the next Form 4 or 5 filed for the insider on which the holding in question appears.

Reportable Transaction (Section 16)

A transaction that must be reported on a Form 4 or a Form 5.

Option/Stock Option Agreement

A written contract setting forth the terms and conditions of an employee stock option grant. While no particular form of words is necessary, the written agreement should express, among other things, an offer to sell at the option price and the period of time during which the offer shall remain open. Typically, the written agreement also contains the complete name of the individual receiving the stock option, the effective date of the stock option, the type of stock option granted, such as ISO or NSO, the number of shares of stock covered by the option, the option price, and the vesting schedule for the shares of stock covered by the option.

Prospectus

A written document used as a selling piece in an offering of securities that contains certain specified information about the issuer, its business and financial condition, and the terms and conditions of, and risks associated with, the offering. A prospectus is a condensed version of the registration statement filed with the SEC in connection with the offering of securities.

Proxy Notice

A written notice to a shareholder/stockholder providing notification of the date, time, and place of a corporation's annual meeting of shareholders/stockholders and describing the matters to be submitted for the approval of the shareholders/stockholders at such meeting.

Promissory Note

A written promise to pay a specified amount of money at a specified time in the future; may be unsecured or secured with collateral acceptable to the holder of the note; if recourse is not limited specifically to the underlying collateral, holder will be entitled to recourse against all of the assets of the maker.

Confirmation of Exercise

A written statement issued by a corporation to an optionee setting forth specific information about a stock option exercise transaction. In the case of an exercise of an ISO, this statement is sometimes used to provide the information required by Section 6039 of the Code to be provided to an employee.

APB 25

Accounting Principles Board (APB) Opinion No. 25, issued in 1972, set out the accounting standards for both compensatory and noncompensatory options before FAS 123(R) (now codified as ASC Topic 718 for grants to employees and ASC Subtopic 505-50 for grants to nonemployees), which supersedes it.

ASC Subtopic 505-50

Accounting Standards Codification (ASC) Subtopic 505-50, "EquityBased Payments to Non-Employees," governs the accounting treatment in the U.S. of equity awards to nonemployees. Before FASB's 2009 codification of GAAP, it was part of FAS 123(R). See "FAS 123(R)."

ASC Topic 718

Accounting Standards Codification (ASC) Topic 718, "Stock Compensation," governs the accounting treatment in the U.S. of equity awards to employees. Before FASB's 2009 codification of GAAP, it was part of FAS 123(R). See "FAS 123(R)."

Accounting Standards Codification Topic 718 (ASC 718)

Accounting provision mandating that compensation expense for options and awards granted to employees is determined at grant, and is generally not adjusted for subsequent events (with the exception of forfeitures), provided that the option or award can only be settled in stock. This was called FAS 123(R) until it was recategorized as part of FASB's 2009 codification of authoritative accounting literature.

Transferable Stock Option (TSO)

An NSO that permits the optionee, under the terms and conditions set forth in the option agreement, to transfer the option to one or more third parties. Because of the limitation on transferability set forth in Section 422(b)(5) of the Code, an ISO cannot be a transferable stock option. Most corporations that permit transferable stock options limit the group of permissible transferees to immediate family members of the optionee or to entities (such as trusts or partnerships) for the benefit of immediate family members. A number of federal income and gift tax issues must be considered in connection with the implementation and use of transferable stock options.

Change in Capitalization

An adjustment to the capital structure of a corporation—for example, due to a stock dividend, stock split, or reverse stock split—that results in either an increase in the number of outstanding securities, with a corresponding reduction in the value of each security, or a decrease in the number of outstanding securities, with a corresponding increase in the value of each security.

Securities and Exchange Commission (SEC)

An agency of the federal government created under the Exchange Act that administers the federal laws regulating the offer and sale of securities within the U.S.

Internal Revenue Service (IRS)

An agency of the federal government, under the supervision of the Department of the Treasury, that is responsible for administering the federal tax laws.

Form 10-K

An annual disclosure report for issuers subject to the reporting requirements of Section 13(a) or 15(d) of the Exchange Act. The report contains information about the business and management of the issuer, legal proceedings involving the issuer, management compensation, and the issuer's latest audited financial statements.

Statutory Stock Option

An employee option accorded favorable tax treatment under Sections 421-424 of the Code; that is, an ISO or Section 423 ESPP option.

Performance-Based Stock Option

An employee stock option granted with terms that provide that the stock option will be exercisable as to the shares of stock subject to the stock option only upon the attainment of one or more performance-based objectives (that is, objectives other than merely continued service with the corporation). For financial reporting purposes, a performance-based stock option is considered a "variable" award that results in a periodic compensation expense for the corporation until the stock option vests or is settled.

Tandem Stock Option

An employee stock option that also provides the optionee with a related right, such as a stock appreciation right, covering an equivalent number of securities. Generally, the exercise of one right affects the holder's ability to exercise the other right. For example, to the extent that an optionee exercises the employee stock option portion of a tandem employee stock option/stock appreciation right, the related stock appreciation right is cancelled, and vice versa.

ISO (Incentive Stock Option)

An employee stock option that meets the requirements of Section 422(b) of the Code and, therefore, qualifies for the preferential tax treatment under Section 421 of the Code. Generally, an ISO does not give rise to federal income tax consequences for the employee either at the time of grant or at exercise. Instead, the employee is subject to taxation at the time of disposition of the shares of stock acquired upon the exercise of the ISO.

Outstanding Option

An employee stock option which has been formally granted by a corporation and not cancelled, exercised, or expired. The shares of stock underlying an employee stock option have their own status, which is affected by exercise and expiration of the stock option as well as cancellation.

Premium-Priced Stock Option

An employee stock option with an option price that is greater than the fair market value of the corporation's stock on the date of grant.

Section 423 Plan

An employee stock purchase plan (ESPP) that qualifies under Section 423 of the Code.

10% Owner For ISOs

An employee who, at the time of grant, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the employer corporation or of its parent or subsidiary corporation. Under Section 422(b)(6) of the Code, such an employee is not eligible to receive an ISO unless, as provided in Section 422(c)(5) of the Code, at the time such option is granted the option price is at least 110% of the fair market value of the company's stock subject to the option and such option by its terms is not exercisable after the expiration of five years from the date such option is granted.

Social Security Tax

An employment tax for retirement income imposed on employees and employers under the Federal Insurance Contributions Act with respect to the wages paid to employees.

Federal Unemployment Tax Act (FUTA)

An employment tax imposed on employers with respect to employee wages.

Tax Withholding with Shares

An exercise feature that allows the optionee to request that the corporation withhold some of the shares of stock being acquired upon the exercise of the stock option in order to satisfy the optionee's withholding tax liability arising in connection with the transaction. The traded shares are assigned a value, usually the fair market value of the corporation's stock on the date of exercise. This value is divided into the total taxes due to determine the number of shares of stock required to be withheld. The number of shares of stock exercised is then reduced by the number of shares of stock to be withheld and only the net balance is issued to the optionee.

Net Exercise

An exercise technique that permits the optionee to buy shares with no cash down by agreeing to allow the issuer to withhold (at exercise) that number of shares with a value equal to the full exercise price. The optionee receives only the balance of the shares and pays ordinary income tax on the full exercise price, which is equivalent to the difference between the amount paid for the withheld shares (zero) and their fair market value at exercise.

Director

An individual elected by the shareholders/stockholders of a corporation to serve on the corporation's board of directors who performs the functions of a director set forth in the corporation's charter documents and bylaws.

Broker/Brokerage Firm

An individual or a company that acts as an intermediary between a buyer and seller of securities. A broker receives compensation, in the form of a commission, for assisting in or effecting the purchase or sale of securities. A broker is "registered" with the NASD and the exchange on which the securities are traded. Brokers are also regulated under federal and state securities laws.

Plan Administrator In general

An individual or committee of individuals authorized under an employee stock option plan to administer and carry out the objectives, purposes, terms, and conditions of an employee stock option plan. The plan administrator usually selects the individuals to whom stock option grants are to be made, determines the number of shares of stock to be covered by a particular grant, sets the option price at which the grant is made, approves the form or forms of written agreement to accompany each grant, and determines all other terms and conditions of the grant (consistent with the employee stock option plan). Typically, the plan administrator will have the power to establish, amend, and rescind rules and policies deemed necessary or appropriate for the proper administration of the employee stock option plan, to make all necessary determinations under the plan, to construe and interpret the provisions of the plan, and to amend or terminate the plan and, under certain circumstances, outstanding stock option grants. Often a corporation's board of directors will act as the administrator of the employee stock option plan or will delegate responsibility for administering the plan to a subcommittee of the board of directors.

Stockbroker

An individual that acts as an intermediary between a buyer and seller of securities. A stockbroker receives compensation, in the form of a commission, for assisting in or effecting the purchase or sale of securities. A stockbroker is "registered" with the National Association of Securities Dealers and the exchange on which the securities are traded. Brokers are also regulated under federal and state securities laws.

Share

An individual unit of a class of equity securities that represents the basic ownership interest of a corporation.

Optionee

An individual who has been granted an option.

Employee

An individual who performs services for an employer, subject to the direction and control of the employer as to the type of work and manner of performance. Employee status is distinct from that of an independent contractor. For income tax purposes, W-2 withholding of income taxes on wages applies only to employees.

Transfer Agent

An institution selected by an issuer to issue and transfer share certificates representing the ownership of the outstanding securities of the issuer. An agent of the corporation responsible for registering shareholder/ stockholder names on the corporation's records. The transfer agent maintains a current list of shareholders/stockholders for purposes of distributing dividends, reports, and other corporate communications.

Recapitalization

An internal reorganization of the capital structure of the corporation. Typically, a reorganization involves a change to the type or number of securities outstanding. Sometimes the transaction will involve an amendment to the corporation's charter documents.

Public Offering

An offering of securities to the general public under a registration statement prepared and filed with the SEC in accordance with the 1933 Act and any applicable blue sky laws.

Form 5

Annual change in beneficial ownership report for directors, officers, beneficial owners of more than 10% of a class of an issuer's registered equity securities, and any other person subject to Section 16 of the Exchange Act. A Form 5 requires information on holdings and changes in beneficial ownership by a reporting person of non-derivative securities and derivative securities that are exempt from current reporting. A Form 5 must be filed with the SEC within 45 calendar days after the end of the issuer's fiscal year.

Shareholder/Stockholder Approval

Authorization by shareholders of a corporate transaction or event.

Shareholder Approval

Authorization by shareholders of a corporate transaction or event. Generally, shareholder/stockholder approval is sought in connection with the adoption of an employee stock option plan and, in certain instances, with the amendment of such plans.

Common Stock

Basic ownership interest in a corporation that typically confers on the holder of the security the right to vote, select directors, receive dividends, and share in residual assets upon the dissolution or winding up of the business.

10% Owner In general

Beneficial owner of more than 10% of a class of equity securities of an issuer that is registered under Section 12 of the Exchange Act.

Form 4

Change in beneficial ownership report for directors, officers, beneficial owners of more than 10% of a class of an issuer's registered equity securities, and any other person subject to Section 16 of the Exchange Act. A Form 4 requires information on any change in beneficial ownership of non-derivative securities and derivative securities by a reporting person that is not eligible for deferred reporting. With limited exceptions, a Form 4 must be filed with the SEC within two business days after the date of execution of the transaction that results in a reportable change in beneficial ownership.

Stock Option Committee

Committee of the board of directors of a corporation responsible for decisions pertaining to employee stock option grants under the corporation's employee stock option plan.

Right of First Refusal

Contractual restriction imposed on shares of stock that entitles a corporation to match any third party offer to purchase the shares of stock subject to the restriction on the same terms and conditions as the third party offer.

Repurchase Option/Right

Contractual right reserved by the issuer to repurchase shares from employees (or service providers) at the time of their termination of employment (or service contract) or on another specified event. In general, the issuer will always reserve the right to repurchase unvested shares at their original purchase price. In privately held companies, the issuer may also reserve the right to purchase vested shares at their then-fair market value. Note that many forms of repurchase rights will expire under their terms at the time of an IPO.

Transfer

Conveyance of property, such as shares of stock, from one individual to another individual, followed by recording the ownership of the property on the records of the issuer.

Preferred Stock

Equity securities of a corporation that carry certain rights, preferences, and privileges superior to the common stock. Preferred stock generally receives an investment return at a specific rate whenever dividends are declared, and it has priority to the earnings and assets in the event of a sale or liquidation of the corporation before distributions may be made to the common shareholders.

Regulation D

Exemption promulgated by the SEC under the 1933 Act for the private placement of securities that permits limited offerings of securities made in compliance with the conditions of the regulation and exempts such offerings from the registration requirements of the 1933 Act.

Nonexempt Transactions (Section 16)

For Section 16 purposes, this term refers to transactions that are subject to the short-swing profit recovery provisions of Section 16(b).

Exempt Transactions (Section 16)

For Section 16 purposes, this term typically refers to transactions that are exempt from the short-swing profit recovery provisions of Section 16(b). Most exempt transactions are still reportable under Section 16(a), although in some cases, this term refers to transactions that are exempt from both the short-swing profit recovery provisions of Section 16(b) and the reporting requirements of Section 16(a).

Intrinsic Value

For accounting purposes, the difference (if any) between the exercise price and the fair market value of a share of the underlying stock on the measurement date.

Measurement Date

For accounting purposes, the first date on which both the number and the price of shares subject to an option is known. The measurement date for a fixed award is the date of grant, while the measurement date for a variable award is the date of vesting (or expiration).

Fair Value

For accounting purposes, the value of an option determined in accordance with ASC Topic 718 and ASC Subtopic 505-50 (formerly FAS 123(R)), using a pricing model such as Black-Scholes or a lattice model.

Compensation Expense (for Equity)

For financial reporting purposes, the "cost" recognized by a corporation on its financial statements with respect to the issuance of its securities in connection with a stock-based compensation plan or arrangement. Under ASC Topic 718 (formerly FAS No. 123(R)), the amount of compensation expense associated with an employee stock option represents the "fair value" of the employee stock option calculated as of the date of grant of the option using a mathematical option pricing model (such as the Black-Scholes Option Pricing Model).

Modification

For purposes of a statutory option, a beneficial change to the terms of an option (including by way of example, the number of shares, an extension of the term, pricing, or the method of financing). Under Section 424 of the Code, the underlying option will be disqualified from statutory option treatment unless it is treated as a new option as of the date of the modification.

Qualifying Disposition

For purposes of stock purchased pursuant to a statutory stock option, a disposition made after a minimum of two years from grant and one year from exercise (pursuant to Section 421 of the Code).

Disqualifying Disposition

For purposes of stock purchased pursuant to a statutory stock option, a disposition made within two years from grant or one year from exercise (pursuant to Section 421 of the Code).

Spread

For shares purchased under an option, the difference, if any, between the option price and the fair market value of the shares on the date of exercise (or, if exercise is for unvested shares, on the date of vesting).

Fair Market Value

For tax and accounting purposes, the value of a share of stock on any given date. In a privately held company, fair market value is determined by the corporation's board of directors. In a public company, fair market value is determined with reference to the price posted on the applicable stock market (generally this is closing price, but it depends on how the plan was drawn up).

Constructive Receipt

For tax purposes, income has been constructively received (and is subject to taxation) at the first time that the taxpayer has an unrestricted right to receive such property, regardless of whether or not he chooses to do so. Note that Section 409A of the Code essentially treats any "nonqualified deferred compensation" that does not satisfy specific requirements as constructively received as of the date the taxpayer had a legally binding right to the payment

Holding Period

For tax purposes: The length of time stock must be held before transfer for any gain to be eligible for capital gain treatment. For statutory option purposes, the period is one year from exercise and two years from grant (set out in Section 421 of the Code); for general capital gains purposes, the period is one year from the date of transfer of capital property (Sections 1221-1223 of the Code). The tax holding period begins on the date the property is first transferred (regardless of whether purchased with a note or subject to contractual restrictions). For Rule 144 purposes: The length of time unregistered stock must be held before transfer. If purchase is with a note, the securities holding period begins only when the note is paid off or fully collateralized with property other than the underlying stock.

Exercise Notice

Form completed and submitted by an optionee to the issuer that provides notice of the optionee's intention to exercise an option. Generally, an exercise notice requires the optionee to identify the option being exercised, indicate the number of shares of stock being purchased, provide payment of the aggregate option price for the shares of stock being purchased in a form permitted under the option agreement, make certain representations to the corporation concerning the optionee's investment intent, and agree to certain restrictions imposed on the shares of stock.

Form S-8

Form of registration statement under the 1933 Act that may be used by issuers subject to the reporting requirements of Section 13(a) or 15(d) of the Exchange Act to register securities issuable to participants in an employee benefit plan, such as an employee stock option plan.

Cashless Exercise

Form of stock option exercise in which the option price for the number of shares of stock being purchased is paid with consideration other than cash. Common cashless exercise methods include broker-assisted same-day sale transactions and stock swaps.

Cliff Vesting

Form of vesting in which an installment of shares vests on a single date rather than ratably over a period of months. For example, for a four-year option, a typical cliff vesting schedule might provide that 25% of the total shares vest on the first anniversary of the grant date, with the remainder vesting monthly over the following three years of employment.

Security

General term, used to describe instruments, such as shares of stock, bonds, and debentures, as well as other instruments that have one or more characteristics of a security. The traditional definition of a security is an instrument that involves an investment where the return is primarily or exclusively dependent on the efforts of a person or persons other than the investor.

Reverse Stock Split

Generally, a change in the capitalization of a corporation that decreases the number of securities outstanding and adjusts the value of the securities upward.

Compensation Income (for Equity)

Gross income recognized and taxed as ordinary income by a service provider in connection with the transfer of equity from the service recipient (e.g., exercise of an NSO, disqualifying disposition of an ISO, or purchase or receipt of restricted stock).

Statutory Holding Period

Holding period established by Sections 422 and 423 of the Code for ISOs and ESPP options: one year from exercise and two years from grant.

Vesting Period

In general, the time period over which shares become vested, as set out in the option grant or purchase agreement.

Cancellation

In the context of an employee stock option plan, a transaction (usually triggered by a specific event, such as an optionee's termination of employment) in which an outstanding employee stock option is rescinded and the unexercised shares of stock subject to such option are returned to the pool of shares reserved for issuance under the plan.

Ordinary Income

Income, such as compensation income, taxed at ordinary rather than capital gains rates under the Code.

Form 1099

Information report that must be provided to the service provider by the service recipient with respect to any non-wage compensation income earned or received during the taxable year covered by the report.

No-Action Letter

Interpretive letter issued by the SEC to a specific requestor, indicating the SEC staff's advice regarding the application of specific securities forms or rules; available to the public.

Lattice Models

Models for determining the fair value of employee stock options that use a decision-tree approach of possible future outcomes. A value is arrived at based on the weighted probability of all possible future outcomes. There are many kinds of lattice models including binomial models and trinomial models, among many others.

Discount Option

Option with an exercise price below fair market value on date of grant.

Grace Period

Period of time provided under an option agreement for the exercise of an employee stock option following termination of the optionee's employment. Typically, this period of time ranges from 30 days until the expiration of the original option term, may vary depending upon the reason for the termination of employment, and is limited to the exercise of shares of stock that were vested as of the date of termination.

Post-Termination Exercise Period

Period of time provided under an option agreement for the exercise of an employee stock option following termination of the optionee's employment. Typically, this period of time ranges from 30 days until the expiration of the original option term, may vary depending upon the reason for the termination of employment, and is limited to the exercise of shares of stock that were vested as of the date of termination.

Employer

Person who directs and controls the performance of services by an employee.

Collateral

Property given as security for a loan (e.g., a promissory note).

Capital Asset

Property that meets the definition in Section 1221 of the Code, as follows: property held by a taxpayer, other than (1) stock in trade, inventory or property held primarily for sale to customers in the ordinary course of business, (2) real property or depreciable property used in a trade or business, (3) a copyright, a literary, musical, or artistic composition or similar property of a taxpayer who created such property, (4) accounts or notes receivable acquired in the ordinary course of a trade or business, or (5) publications of the United States government received at a discount. In general, securities (including stock purchased upon exercise of an option) are a capital asset

Section 83 of the Code

Provision of the Code that governs the taxation of property (including stock) received in connection with the performance of services. Section 83 provides that the difference between the fair market value of such transferred property and the amount (if any) paid for such property must be recognized on the first date that the property is freely transferable or not subject to a substantial risk of forfeiture (i.e., vested). Section 83 governs the federal income tax consequences of the grant and exercise of a nonqualified stock option.

Section 162(m) of the Code

Provision of the Code that limits the ability of publicly traded corporations to deduct as an ordinary and necessary business expense certain employee remuneration in excess of $1 million paid to specified "covered employees" of the corporation.

Section 6039 of the Code

Provision of the Code that requires corporations to provide, by January 31 of the following year, certain specified information to employees who have exercised an ISO or transferred stock under a Section 423 plan.

Section 16(b) of the Exchange Act

Provision of the Exchange Act that requires the directors and officers of an issuer that has registered a class of its equity securities under Section 12, as well as the beneficial owners of more than 10% of any class of the issuer's registered equity securities, to return over to the issuer any profits realized from the purchase and sale, or sale and purchase, of the issuer's equity securities within a period of less than six months.

Regulation T

Provision promulgated by the Board of Governors of the Federal Reserve System to regulate the extension of credit by brokers and dealers in connection with the purchase or carrying of securities.

Regulation G

Provision promulgated by the Board of Governors of the Federal Reserve System to regulate the extension of credit by persons other than banks or brokers and dealers in connection with the purchase or carrying of marginable securities. Generally, this provision would apply to the extension of credit by certain corporations in connection with the purchase of shares of stock under an employee stock option plan.

Exercise

Purchase of stock pursuant to an option.

Section 12 Registration

Registration of a class of an issuer's equity securities under Section 12 of the Exchange Act. Registration under Section 12 is required if securities of the class are listed on a national securities exchange or are held by 2,000 or more individuals or 500 or more non-accredited investors and the issuer has total assets exceeding $10 million, as of the last day of the issuer's most recent fiscal year.

California Commissioner's Rules

Regulations implementing the California Securities Act of 1968.

Rule 16b-3

Rule promulgated by the SEC that provides that transactions between an issuer that has registered a class of equity securities under Section 12 of the Exchange Act (including an employee benefit plan sponsored by the issuer) and a director or officer of the issuer that involve equity securities of the issuer will be exempt from the operation of the "shortswing profits" recovery rule of Section 16(b) of the Exchange Act if the transaction satisfies the applicable conditions set forth in the rule.

Rule 144

Rule promulgated by the Securities and Exchange Commission as a "safe harbor" for the resale of "restricted securities" (that is, securities that were acquired other than in a public offering) and "control securities" (that is, securities owned by affiliates of the corporation).

Income Tax Regulations

Rules promulgated by the Internal Revenue Service implementing and interpreting the statutory provisions of the Code, which have the force of law. Congressional authority for the issuance of regulations is set forth in Section 7805 of the Code.

Tax Regulations

Rules promulgated by the Internal Revenue Service implementing and interpreting the statutory provisions of the Code. Congressional authority for the issuance of regulations is set forth in Section 7805 of the Code. While such rules are not law, they represent the Internal Revenue Service's interpretation of the proper application of the law and are presumed to be valid.

Disposition

Sale, gift, or other transfer of stock purchased pursuant to an option.

Restricted Securities

Shares of stock issued in a transaction that was not registered under the 1933 Act in reliance on an exemption. Resale of such shares is generally subject to Rule 144 (or subsequent registration).

Unvested Shares

Shares of stock that an individual has not yet earned and, therefore, may not transfer to a third party. Entitlement to the shares of stock is subject to the satisfaction of one or more contingencies (generally service-based) that are attached to the receipt of the shares of stock.

Treasury Shares (Treasury Stock)

Shares of the capital stock of a corporation that were previously issued by the corporation and have been reacquired and are being held in "treasury" rather than retired. Substantively, treasury shares are equivalent to authorized but unissued shares. However, the corporation may reissue treasury shares without having to satisfy the minimum consideration requirements of state corporate law. Several states do not recognize the concept of treasury shares.

Proxy Statement

Solicitation materials relating to an issuer's annual meeting of shareholders, which must be delivered in advance of the meeting. Generally, these materials describe the agenda items for the meeting and contain certain specific information about the directors and principal shareholders/stockholders of the corporation, the compensation of management, and detailed information on proposals to be submitted to the shareholders/stockholders for approval.

Blue Sky Laws

State securities laws governing the purchase and sale of securities. The phrase "blue sky" originates from a federal case that described such laws as aimed against "speculative schemes which hold no more basis than so many feet of blue sky."

FAS 123(R)

Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment." The Financial Accounting Standards Board's revision of its FAS 123 accounting standard. Mandates that compensation expense for options and awards granted to employees is determined at grant and is generally not adjusted for subsequent events (with the exception of forfeitures), provided that the option or award can only be settled in stock. Under FASB's 2009 codification of GAAP, FAS 123(R) has now been codified as ASC Topic 718 for grants to employees and ASC Subtopic 505-50 for grants to nonemployees. See "ASC Subtopic 505-50" and "ASC Topic 718."

FAS 123

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." FAS 123 requires companies to place a "fair value" on employee stock options not otherwise covered by APB 25 as of the date of grant and to either reflect such value as a charge to earnings during the service period or disclose the amount that would have been charged in a footnote to the company's financial statements.

Legend

Statement printed on a stock certificate to indicate that the securities represented by the certificate are subject to limitations or restrictions on transfer. Generally, used to denote that the securities were issued in a private placement and, therefore, are "restricted securities" and "legended stock" for purposes of the federal securities laws. May also reflect a contractual restriction that has been placed on the securities by the issuer as a condition to their original issuance.

GAAP (Generally Accepted Accounting Principles)

Substantive rules for the practice of accounting as established by the body of opinions and decisions issued by the FASB.

Realization

Tax concept that describes when gain (whether or not reduced to cash) is treated as compensation. Generally, a gain is considered "realized" when it has been received by a person for such person's use, benefit or disposal. For example, the exercise of an employee stock option to purchase shares of stock that have appreciated in value will be considered a realization of gain since the optionee has taken the final steps to obtain the benefits of economic gain that had previously accrued to the optionee. Realized gain is not necessary taxed at the time of the realization: see "recognition."

Recognition

Tax concept that describes when realized gain becomes taxable. Most realized gains are taxable at the time reported; however, tax recognition of some realized gains may be deferred under the Code. For example, Section 1036 of the Code is a nonrecognition provision that provides that any gain realized from an exchange of shares of stock of a corporation for other shares of stock of the same corporation (such as in a stock swap exercise of an employee stock option) is not to be recognized at the time of the exchange. Instead, typically an adjustment to the basis of the property involved is made to preserve any unrecognized gain or loss, which may eventually be subject to taxation at a later time.

Substantial Risk of Forfeiture

Tax concept under Section 83 of the Code that describes a situation in which an individual's rights to the full enjoyment of property is conditional upon the future performance of substantial services.

Equity

Term that refers to an ownership interest in a corporation. Equity also represents the amount of capital invested by the shareholders/stockholders plus the retained earnings of the business. The term is also used to denote the capital stock of a corporation.

Nonrecourse Loan

Term used to describe a loan or other obligation that does not provide for personal liability against the debtor. In the event of a default on the obligation, the creditor is limited to recovery on the collateral provided for in the loan.

Recourse

Term used to describe a loan or other obligation that provides for personal liability against the debtor. In the event of a default on the obligation, the creditor can seek to foreclose on the personal assets of the debtor.

Nontransferability Restriction

Term used to describe a restriction imposed on a security that precludes its transfer or conveyance to a third party.

In the Money

Term used to describe an employee stock option where the current fair market value of the shares of stock subject to the option is greater than the exercise price.

Underwater or "Out of the Money"

Terms used to describe an employee stock option where the option price is greater than the current fair market value of the shares of stock subject to the stock option.

Internal Revenue Code (Code)

The Internal Revenue Code of 1986, as amended; the key federal statute providing for taxation of individuals, corporations, and other persons.

Code

The Internal Revenue Code of 1986, with such modifications, revisions, and additions as are made from time to time.

Tax Deferral

The ability to postpone the payment of taxes from the date of a specific transaction until a later date. For example, assuming that a stock option designated as an ISO satisfies the conditions of Section 422(b) of the Code, upon exercise of such ISO the employee is permitted to defer the recognition of taxable income in connection with the acquisition of the shares of stock received upon exercise of the stock option until the disposition of such shares of stock.

Repricing

The adjustment of the option price of an outstanding employee stock option to reflect a decline in the value of the corporation's stock subject to the stock option. Typically, a stock option "repricing" takes the form of either an amendment of an outstanding stock option to reduce the exercise price or a cancellation of an outstanding employee stock option in exchange for the grant of a new stock option that has an option price equal to or greater than the current fair market value of the corporation's stock. The repricing of employee stock options is subject to extensive regulation and may trigger, among other things, significant income tax, securities law, and accounting consequences.

Corporate Tax Deduction (for Equity)

The amount realized on exercise of an option (or other compensatory transfer of equity) that is deductible on the corporate income tax return as a trade or business expense under Section 162 of the Code (subject to the application of Section 162(m)). Generally, the amount of deductible compensation expense is equal to the amount of compensation income recognized by the employee for federal income tax purposes.

Fiscal Year

The annual accounting period for a corporation. A fiscal year is a period of 12 consecutive months. It frequently coincides with the calendar year, but can conclude at the end of a different month. For example, a fiscal year can run from October 1 to September 30.

EDGAR (Electronic Data Gathering, Analysis, and Retrieval System)

The automated computer system developed and implemented by the SEC for the filing of registration statements, periodic reports, and other filings mandated under the federal securities laws by issuers registered under Section 12 of the Exchange Act.

Stock

The basic form of equity issued by a corporation (other than a limited liability company). A corporation may issue different classes and series of stock, including common and preferred stock, as well as voting and nonvoting stock.

Plan Expiration Date

The date after which shares of stock may no longer be granted, awarded, or issued pursuant to the terms and conditions of a stock plan.

Exercise Date

The date on which an employee stock option is exercised.

Termination Date (Option)

The date on which an option terminates, which may be either at the end of a stated term or at the time of the optionee's termination of employment (or service contract) with the company.

Grant Date

The date upon which an employee stock option is approved by the company's board of directors.

Transfer Date

The date upon which securities are considered to have been transferred from one person to another

Capital Loss

The decrease in value realized from the sale or exchange of a capital asset; that is, the excess of the basis of the asset over the proceeds received from the transaction.

Authorized but Unissued

The difference between the number of securities of a given class authorized for issuance under a corporation's charter documents and the number of securities of that class that are issued and outstanding.

Alternative Minimum Tax (AMT) For ISOs

The difference, if any, between the option price and the fair market value of the stock of the corporation on the date of exercise of an ISO is an AMT adjustment, and therefore—although it is otherwise excluded from gross income in the year of exercise—it will be added back when computing alternative minimum taxable income (AMTI). If an ISO produces AMT, it may result in a tax credit against ordinary income tax in future years.

Shares Outstanding

The equity securities of a corporation that have been issued to, and are currently held by, the shareholders/stockholders of the corporation. In the context of an employee stock plan, the shares of stock of a corporation that have been sold and issued to, and are currently held by, the participants in the plan.

Early Exercise

The exercise of an option before the time that the shares issued pursuant to such option have vested under the option's vesting schedule.

Registration

The formal process for the issuance of securities under federal and/ or state securities laws that permit public sale of securities.

Capital Gain

The increase in value, or profit, realized from the sale or exchange of a capital asset; that is, the excess of the proceeds received from the transaction over the basis of the asset. Capital gains can be short-term (where the capital asset was held for one year or less) or long-term (where the capital asset was held for more than one year). Generally, long-term capital gains are taxed at rates more favorable than those applicable to ordinary income.

Available for Grant

The incremental difference between the number of shares of stock authorized for issuance under a stock option plan and the number of shares already subject to option. Cancelled shares that are added back to the plan and any increase in the number of shares available for issuance pursuant to the plan are included in the calculation of shares "available for grant."

Form 3

The initial ownership report for directors, officers, beneficial owners of more than 10% of a class of an issuer's registered equity securities, and any other person subject to Section 16 of the Exchange Act. A Form 3 requires information on the number of non-derivative securities and derivative securities beneficially owned at the time the reporting person becomes subject to Section 16 and, except in the case of an issuer's first registration of a class of equity securities pursuant to Section 12 of the Exchange Act, must be filed with the SEC within 10 calendar days of that date. A Form 3 must be filed with the SEC even if the reporting person does not own any securities of the issuer at the time the filing is required.

Expiration Date

The last date on which an employee stock option may be exercised by an optionee. This date is typically set forth in the option agreement for the employee stock option and usually ranges from five to ten years following the date of grant of the employee stock option. Also refers to the date on which an employee stock option plan expires.

Swapped Shares

The number of shares of stock tendered to the corporation in a stock swap exercise. The swapped shares are assigned a value, typically the fair market value of the corporation's stock on the date of exercise. To complete the transaction, the optionee must deliver to the corporation a certificate or certificates covering enough previously issued and presently owned shares of stock to pay the aggregate option price for the share of stock being acquired through the stock option exercise.

Share Reserve

The number of shares of stock that have been authorized and reserved by a corporation's board of directors for issuance pursuant to an employee stock option plan.

New York Stock Exchange (NYSE)

The oldest organized stock exchange.

Option Term

The period of time granted to an individual to exercise an employee stock option. Generally, the term of an employee stock option ranges from five to 10 years.

Blackout Period

The period, as determined by a corporation, during which the securities of the corporation may not be sold by certain designated individuals, typically the corporation's insiders. Generally, the period runs from some predetermined time following the release of the corporation's quarterly or annual financial results until 24 to 48 hours following the release of the subsequent period's financial results. Also, a period during which the ability of participants or beneficiaries in a corporation's pension plan to direct or diversify assets credited to their accounts, to obtain loans from the plan, or to obtain distributions from the plan is temporarily suspended, limited, or restricted.

Plan Administrator For purposes of Section 16 of the Exchange Act

The plan administrator of an employee stock option plan of an issuer with a class of equity securities that has been registered under Section 12 of the Exchange Act will often be composed of individuals who qualify as "nonemployee" directors for purposes of Rule 16b-3.

Backdating

The practice of setting an option exercise price that is less than fair market value on the grant date. The term has been used to describe practices as varied as intentional discounting (i.e., intentionally stating that the option was granted on a date different than the actual grant date), misdating (unintentionally stating the incorrect grant date price), "spring-loading" (granting options before good news breaks), "bullet-dodging" (granting options after bad news breaks), "forward-dating" (approving options with a grant date set after approval), and 30- day pricing (approving options with grant price to be set at average or best price in a 30-day window). Backdating may raise accounting, SEC disclosure, and tax issues (particularly under Section 409A of the Code).

Exercise Price

The price at which an option may be exercised, stated in the option agreement. Also called the "strike price."

Over-the-Counter (OTC) Market

The public trading market for securities which are not traded on either the AMEX or the NYSE. It is composed of brokerage firms making a market and executing transactions in non-listed securities. The over-thecounter market operates primarily through telephone transmissions rather than through the auction-style market found at the exchanges.

Repurchase

The reacquisition of shares of stock from an individual by a corporation. Depending on the nature of a corporation's repurchase rights, the corporation may pay the original cost of the shares of stock to the individual or the fair market value of the shares of stock at the time of repurchase.

Street Name Issuance

The registration of a security in the name of a securities brokerage firm as a nominee for the beneficial owner of the securities. Securities are often held in "street name" to expedite transfers of the securities when the securities are sold, since no delivery of the certificate or signature of transfer by the beneficial owner is required.

Regrant

The reissuance or replacement of a previously granted employee stock option, often with terms and conditions that differ from those in the original stock option.

Tax Withholding

The retention of certain amounts from an employee's wages or compensation by a corporation to satisfy income tax and/or employment tax obligations.

Withholding

The retention of certain amounts from an employee's wages or compensation by a corporation to satisfy the income tax and/or employment tax obligations of the employee that arise in connection with the exercise of a nonqualified stock option.

AMEX (American Stock Exchange)

The second largest organized stock exchange, on which corporate securities are traded. Because the listing requirements of this exchange are considered to be less stringent than those of the New York Stock Exchange, the exchange generally trades the securities of small-to-medium-sized corporations

Vesting Schedule

The specific schedule that dictates vesting. For an option, the vesting schedule may be the same as the exercise schedule (i.e., the option may only be exercised as to shares that are already vested) or may be different (i.e., the option may be exercised "early" as to shares that are not already vested). If early exercise is permitted, the shares themselves will be subject to vesting (see "repurchase option").

Term

The stated period of time within which an option may be exercised (before it expires). Generally, the term of an employee stock option will be a period of up to 10 years. Also may refer to the duration of an employee stock option plan, during which time the plan administrator may grant stock options to eligible participants in the plan

Termination of Plan

The termination of a stock option plan resulting from either the affirmative decision of the plan administrators to wind up the plan, the exhaustion of the plan share reserve or the expiration of the stated plan term.

Capitalization

The total value of all securities that have been issued by a corporation. A corporation's capitalization may include both equity securities and debt securities.

Trade Share Value

The value assigned to an exercised share that is traded back to the corporation to satisfy a withholding tax liability arising in connection with a stock option exercise. Commonly the trade share value is equal to the fair market value of the corporation's stock on the date of exercise.

Discretionary Transactions

Transactions in a 401(k), profit sharing, pension, or similar retirement plan that involve the movement of funds between investment alternatives or a distribution. Where the discretionary transaction involves movement of into or out of a company stock investment or involves the distribution of funds invested in company stock, the transaction is reportable for Section 16(a) purposes and may be subject to the shortswing profit recovery provisions of Section 16(b).

"Lock-Up" Restrictions

Transfer restrictions imposed by the underwriters of a public offering of securities on the directors, officers, principal shareholders, and, possibly, others associated with the issuer in order to maintain an orderly trading market in the issuer's securities.

Matchable Transactions

Two transactions that can be matched against each other to trigger recovery of short-swing profits under Section 16(b). Both transactions must be nonexempt (i.e., not exempt from the requirements of Section 16(b)), the transactions must be opposite-way (i.e., an acquisition and a dispositions), and the transactions must occur within a period of less than six months. The earlier of the two transactions must occur while the individual executing them is subject to Section 16. It does not matter whether the acquisition or the disposition occurs first.

Opposite-Way Transactions

Two transactions that have an opposite effect on a Section 16 insider's holdings; i.e., one transaction increases the insider's holdings and the other decreases his or her holdings. A purchase and a sale are an example of opposite-way transactions.

Same-Way Transactions

Two transactions that have the same effect on a Section 16 insider's holdings; i.e., both transactions increase the insider's holdings or both decrease his or her holdings. A purchase and the grant of a stock option are an example of same-way transactions.

Employee Stock Purchase Plan (ESPP)

Type of stock option plan that provides for ongoing stock purchases by employees pursuant to a subscription agreement. May be a tax-qualified statutory option plan under Section 423 of the Code or may result in nonstatutory option treatment under Section 83. Tax-qualified plans generally include a discount from market price, determined either as of the first or last day of the applicable exercise period. See "Section 423 Plan."

Covered Employee

Under Code Section 162(m), a person whose compensation is only deductible by the issuing corporation up to $1 million. Covered employees include anyone who is currently or has ever been the CEO, CFO, or among the other three most highly compensated employees in a year at a corporation that issues securities that must be registered under Section 12 of the Securities Exchange Act of 1934, a company that is a reporting company under Section 15(d) of the Securities Exchange Act of 1934, or a foreign private issuer.

Affiliate

Under Rule 144, a person who directly or indirectly controls, is controlled by, or is under common control with the issuer. are subject to certain limitations as to volume and timing with respect to sale of unregistered (restricted) stock of the issuer.

Short-Swing Profits Recovery Rule

Under Section 16(b) of the Exchange Act, a rule requiring directors and officers of an issuer that has registered a class of its equity securities under Section 12, as well as the beneficial owners of more than 10% of any class of the issuer's registered equity securities, to disgorge to the issuer any profits realized from the purchase and sale, or sale and purchase, of the issuer's equity securities within a period of less than six months.

One Million Dollar Cap

Under Section 162(m) of the Code, the maximum amount of compensation paid to "covered employees" that may be deducted by a publicly traded corporation.

Golden Parachute

Under Section 280G of the Code, a package of compensation-related benefits (including options) awarded to an employee contingent upon a change in control of the employer corporation.

Wages

Under Section 3401 of the Code, remuneration (in any form) paid to an employee in connection with services rendered to the employer.

Readily Ascertainable Fair Market Value

Under Section 83 of the Code, an option must have a "readily ascertainable fair market value" in order to be taxed at the time of grant. In order to have a readily ascertainable fair market value, the income tax regulations require that the stock option either be actively traded on an established securities market or, if not actively traded on an established securities market, the fair market value of the stock option be measurable with reasonable accuracy. The income tax regulations further provide a series of conditions that must be satisfied in order for an employee stock option to meet the "reasonably accurate measurement" test, including, among other things, free transferability of the stock option and the absence of restrictions that could significantly affect the value of the stock option or the underlying shares of stock. Since employee stock options are virtually always nontransferable and subject to vesting restrictions, such stock options seldom would have a readily ascertainable fair market value at the time of grant. As a result, the compensatory element of the acquisition of the employee stock option will not be subject to taxation under Section 83 of the Code until the stock option is exercised

Section 83(b) Election

Under Section 83(b), a taxpayer may elect to treat the spread (if any) on transfer of property as vested for purposes of federal income tax (and the capital gains holding periods) on the date of transfer, even if such property is otherwise unvested for non-tax purposes. If the spread on transfer is minimal, ordinary income tax attributable to the spread may be significantly reduced from what it would otherwise be at the time of vesting. The election is a technical device and requires the taxpayer to file a written statement with the IRS no later than 30 days after the date of transfer of property.

Equity Compensation

Use of equity (rather than or in addition to cash) to compensate a service provider. The most common forms of equity compensation include restricted stock, stock options, and "phantom" stock.

Run Rate

Used as a measure of dilution, this is the number of options granted annually (less option cancellations) as a percentage of total shares issued and outstanding.

Overhang

Used as a measure of dilution, this is the percentage of company stock represented by all potentially grantable shares under the plan. It is calculated by adding the total number of shares represented by outstanding unexercised stock options to the number of additional shares available for grant and then dividing that sum by the total number of shares of common stock outstanding.

IASB (International Accounting Standards Board)

Voluntary global accounting standards-setting organization whose member nations include the U.S., Australia, Canada, France, Germany, Japan, New Zealand, and the U.K. IASB standards are intended to establish GAAP on an international basis.

Out-of-the-Money or Underwater

When the option price is greater than the current fair market value of the shares of stock subject to the stock option.

Offering Period

With respect to an ESPP, the period starting with the grant or offering date and ending with the exercise date.

Vesting

With respect to shares of stock, the process through which shares are earned over a period of employment (or provision of services); for purposes of Section 83 of the Code, shares become vested on the first date they are transferable or not subject to a substantial risk of forfeiture. Conditions for vesting are generally stated in either the option grant (for stock options) or the restricted stock purchase agreement (for stock purchase).

Acceleration

With respect to unvested shares, speeding up the vesting schedule (that is, decreasing the period over which vesting restrictions lapse).

Beneficial Owner For Section 16

a person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or other means has or shares a direct or indirect pecuniary interest in equity securities. Securities are "beneficially owned" for these purposes if the holder is entitled to the economic benefits resulting from a transaction in them, whether or not the holder is the record, or registered, owner of the securities.

Beneficial Owner Under the Exchange Act generally

a person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, has or shares voting power (which includes the power to vote or to direct the voting of) a security and/or investment power (which includes the power to dispose of or to direct the disposition of) such security.

Alternative Minimum Tax (AMT)

federal income tax intended to recapture certain tax preference or adjustment items (such as the spread on exercise of an ISO); the tax is assessed on "alternative minimum taxable income" and, to the extent it is greater than regular taxable income, must be paid in the year computed. AMT is treated as a credit against regular income tax and may be carried forward to future years.