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A person who directly or indirectly controls, or is controlled by, an issuing company. Control means the power to direct the management and policies of the company through ownership of voting securities, by contract or otherwise. Generally, officers, directors, 10% shareholders, and their immediate family members are considered to be affiliates.

Black-Scholes Model

Created by Fischer Black and Myron Scholes, this financial model is one of several used to value options. Such calculations are important to corporations, which are required to expense the value of options granted.

Blackout Period

A period during which companies prohibit employees and affiliates from purchasing or liquidating shares. Blackout periods often coincide with quarter-end, year-end, or other earnings reporting schedules.

83(b) Election

An election that recognizes compensation income on the acquisition of stock (either through a restricted stock grant or the early exercise of an option) prior to the actual vesting of the stock. The election must be made within 30 calendar days of the stock acquisition. When the stock is eventually sold after vesting requirements have been met, the difference between the acquisition price and the sale price is treated as a capital gain or loss. Often used by holders of private stock prior to an IPO, an 83(b) election can also be used where there is a public market for the underlying security. If the executive leaves before the vesting date, the stock is forfeited and no credit or deduction is available for the amount of taxes initially paid.

Exercise Price

The price at which the holder of an employee stock option can purchase company shares.

Form 144

A notice of the proposed sale of restricted securities or control securities under Rule 144 that must be filed with the SEC. The form is valid for 90 days.

Incentive Stock Option (ISO)

A type of employee stock option that offers an employee more favorable tax treatment than a non-qualified stock option. (See "Non-Qualified Stock Option.") No more than $100,000 of ISO option stock (shares times exercise price) can become exercisable in any one year. Upon exercise, the profit between the exercise price and stock price is not taxed as compensation income, provided the underlying stock is held for a period of not less than one year from the date of exercise and two years from the date of grant. After the stock is disposed, the difference between the sale price and exercise price would receive more favorable long-term capital gains treatment Any sale of stock that occurs before this time has elapsed will disqualify the favorable tax treatment and subject the profit to ordinary taxes (a disqualifying disposition). The ISO is nontransferable and must be exercised within 90 days of leaving a company to maintain its tax-deferred status. The ISO profit is considered preferential income for alternative minimum tax (AMT) purposes. As more people find themselves subject to the AMT, the popularity of these options has waned.


Generally an officer, director, or principal stockholder (or a member of his/her immediate family) of a publicly owned corporation (see "Affiliate"). The term may also apply to persons who obtain nonpublic information about a company.

Intrinsic Value

The difference between the exercise price of an option and its current stock price. Typically, an option will have no intrinsic value on the date of its grant.

Non-Qualified Deferred Compensation Plans

Plans that give executives the opportunity to benefit from tax deferral for amounts deferred or awarded above the maximum contribution limits of qualified retirement plans. These plans include SERPs (supplemental executive retirement plans), "Top Hats," and other types of voluntary and mandatory excess benefit plans. They are similar to qualified plans in that they offer the opportunity to defer taxation on current and reinvested earnings. Unlike qualified plans, though, future access to the proceeds is not protected. These plans are not considered funded and are subject to claims by a company's creditors in the event of bankruptcy.

Non-Qualified Stock Option (NQSO or NSO)

An option awarded to employees that has a grant date, an exercise price, a vesting schedule, and a maturity date. Upon vesting, the employee can choose when to exercise an option and acquire the underlying stock. At the time of exercise, the holder must pay the exercise price as well as compensation income tax (ordinary taxes plus Social Security and Medicare) on the profit between the exercise price and the current stock price. Often the underlying shares are sold simultaneously, with the exercise price and taxes netted out (a cashless exercise). Other times, enough shares are sold to cover the exercise price and taxes (sell to cover).

Phantom Stock Award

An award that pays out in cash or stock based on the value of the underlying stock at the end of a specific period. Some awards are conditional upon the company achieving certain performance objectives. Payouts are taxed as compensation income. (See "Stock Appreciation Right.")

Restricted Securities

Unregistered securities acquired directly or indirectly from an issuer or from an affiliate of the issuer, in a transaction not involving a public offering. Certificates of restricted securities are typically stamped with a restrictive legend indicating that the securities have not been registered under the Securities Act of 1933.

Restricted Stock

A compensation award that is granted in the form of company shares of stock. Typically, the stock will be subject to a vesting schedule, with the value of the stock at the time of vesting taxed as compensation income. To pay the taxes, an executive can sell a partial amount of shares and hold the balance.

Restricted Stock Unit (RSU)

A compensation award similar to a grant of restricted stock; however, no actual stock is issued and is considered outstanding until the RSU vests (stock-settled RSUs). The company can also pay out the cash value of the shares upon vesting (cash-settled RSUs). Unlike restricted stock grants, RSUs have no voting rights and do not pay out dividends, although a company can choose to pay out dividend equivalent units. An 83(b) election is not permissible with RSUs.

Rule 10b5-1 Trading Plan

A stock trading plan that falls within the "safe harbor" of Rule 10b5-1, permitting insiders to trade stock during company-imposed "blackout periods" (see above) or when they may be in possession of material nonpublic information ("inside information"), when they would otherwise be constrained from trading.

A 10b5-1 trading plan must be authorized during a time when the issuer's rules would permit insiders to purchase and sell securities issued by the issuer ("window period"). The plan must specify the terms (i.e., amount, date, etc.) of the proposed transaction(s) and must describe in detail any formula, mechanism, or trading program to be followed.

Creating a sales strategy using a 10b5-1 trading plan will allow affiliates to establish a financial plan designed to fit with their long-term goals. Sales of securities under a plan would still have to be executed in compliance with the requirements of US securities law and/or other legal and contractual restrictions.

Rule 144

An SEC rule that permits the public resale of restricted securities or control securities if certain conditions, including holding periods and volume limitations, are met:

* Holding Period: Restricted (unregistered) stock must be held for six months before it may be sold, subject to Rule 144.

* Current Public Information: Adequate current public information must be available on the company.

* Volume Limitations (affiliates only): During any three-month period, the amount of stock that can be sold under Rule 144 cannot exceed the greater of either 1 % of shares outstanding or the average weekly reported trading volume during the four calendar weeks preceding the filing of notice of the proposed sale. Restricted securities held by non-affiliates are not subject to volume limitations if owned for a period of six months.

* Manner of Sale (affiliates only): The securities must be sold in brokers' transactions.

* Filing Notice with the SEC (affiliates only): The seller must file Form 144 at the time of or prior to placing the order. The form is valid for 90 days.

Section 16(a)

A section of the Securities Exchange Act of 1934 that requires certain affiliates to disclose changes in share ownership through the filings of Form 3, 4, or 5.

Section 16(b)

A section of the Securities Exchange Act of 1934 that permits the issuing company to recover "short-swing profits" from an officer, director, or 10% shareholder. A short-swing profit occurs when, within a period of less than six months, there is either a purchase and sale of a security at a higher price or a sale and purchase at a lower price.

Section 16(c)

A section of the Securities Exchange Act of 1934 that prohibits an insider from selling short any equity security of the issuer.

Stock Appreciation Right (SAR)

An award that upon exercise pays out an amount of cash or stock based on the appreciation of the company stock price from the time of grant. The value of such payment is taxed at exercise as compensation income. (See "Phantom Stock Award.")

Time Value

The value of an employee option above and beyond its intrinsic value, based on financial models. When a stock price is at or below an option's exercise price, the option's total value will consist solely of time value. Time value decreases 1) as the time to option expiration shortens and 2) as the stock price rises over the option exercise price.

Total Value

The value of an employee stock option calculated by financial models. The total value is the sum of the option's intrinsic value and time value.


A condition that has to be met before holders of stock, options, and deferred compensation gain ownership of the awards (no risk of forfeiture). The conditions of vesting can be met either by certain time requirements (e.g., one-quarter per year over four years) or corporate performance metrics (e.g., meeting certain earnings per share growth goals).
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Publication:Directors & Boards
Date:Jun 22, 2011
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