Equity Compensation Plans & Design Flashcards

A company adopts a broad-based ESPP qualifying under Section 423 of the IRC. What is the maximum discount from fair market value that participants may receive on shares purchased under the plan?

Answer: 15%

Section 423 ESPPs allow a maximum discount of 15% from the stock's fair market value, which can be applied at the beginning of the offering period, the purchase date, or both.

Under a Section 423 ESPP, what is the maximum offering period permitted?

Answer: 24 months

The IRC allows ESPP offering periods of up to 27 months; however, if a lookback provision is included, the offering period is limited to 24 months under common plan designs to avoid additional accounting issues.

A 'lookback' provision in a Section 423 ESPP benefits participants by:

Answer: Allowing employees to purchase shares at the lower of the stock price at the beginning or end of the offering period

A lookback provision lets participants buy shares at the lower of the FMV at offering start or purchase date, maximizing their discount in a rising market.

Which of the following equity award types typically results in the LEAST dilution per unit of economic value delivered to employees?

Answer: At-the-money stock options

At-the-money options have a grant-date fair value well below the full share price (often 25–40%), so more options can be granted per dollar of compensation expense versus full-value awards, but each option is also less certain to deliver value—making RSUs and PSUs more dilutive per unit granted but less per dollar of value.

An equity plan includes a '10b5-1 plan window' requirement for executives. What is the primary purpose of this requirement?

Answer: To allow executives to establish pre-planned trading arrangements that provide an affirmative defense against insider trading claims

A Rule 10b5-1 plan is established during an open trading window when the executive lacks material non-public information, creating a legal safe harbor for future trades.

A company grants restricted stock (not RSUs) to an executive. To make an 83(b) election, the executive must file with the IRS within:

Answer: 30 days of the grant date

An IRC Section 83(b) election must be filed with the IRS within 30 days of the transfer date (grant date) for restricted property; missing this window forecloses the election permanently.

When a company undergoes a stock split, anti-dilution provisions in equity plans typically require which adjustment?

Answer: The number of shares subject to outstanding awards increases proportionally and the exercise price decreases proportionally

Anti-dilution provisions preserve the economic value of outstanding awards by multiplying the share count by the split ratio and dividing the exercise price by the same ratio.