As if texting shorthand wasn’t complicated sufficient (IKR?), when you’ve inventory choices, restricted inventory items, or an worker inventory buy plan, you’re plunged into an alphabet soup of initialisms, acronyms, and jargon. Are you aware NQSOs from ISOs? AMT from FICA or NIIT? What’s the FMV at choice train? Are you able to promote firm inventory when you already know MNPI? What’s the cope with RSUs, PSUs, ESPPs, and SARs?

With a bit of observe, it’s simple to develop into proficient in these abbreviations—and BTW, given how lengthy and cumbersome among the underlying phrases are, you’ll quickly study to understand them. Furthermore, studying these abbreviations is an effective option to develop into accustomed to among the key options and particulars of inventory compensation. This text supplies a helpful information, organized by matter.

WYSIWYG: Varieties Of Grants

SBC: stock-based compensation, pay that entails firm inventory quite than money.

ESO: worker inventory choice, a proper that an organization awards to buy a selected variety of its shares for a specified value (train value) and interval (typically as much as 10 years). Worker inventory choices are completely different from listed or exchange-traded choices.

NQSO or NSO: nonqualified inventory choice, the essential and most typical sort of ESO. NQSOs don’t qualify for particular tax remedy beneath the Inside Income Code (IRC).

ISO: incentive inventory choice, the opposite main sort of inventory choice. An incentive inventory choice is a kind of ESO that qualifies for particular tax remedy beneath the IRC if sure necessities and holding durations are met.

RSU: restricted inventory unit, the commonest sort of fairness award these days in public firms. A grant of RSUs is a promise to subject you a set variety of shares after you’ve met the associated vesting circumstances, normally a specified interval of continued employment or companies in your firm.

PSU: efficiency share unit, a grant of shares that vests or pays out based mostly on efficiency quite than simply continued employment. Efficiency-based grants could be within the type of efficiency inventory awards (PSAs), that are much like restricted inventory, or efficiency inventory items (PSUs), that are much like RSUs. The most typical efficiency aim metrics are complete shareholder return (TSR) and relative complete shareholder return (rTSR).

ESPP: worker inventory buy plan, a kind of broad-based inventory plan that allows staff to make use of payroll deductions gathered over a purchase order interval (e.g. one, three, six, twelve months) to accumulate inventory from the corporate, typically at a reduction or at the least with out fee.

SAR: inventory appreciation proper, a contractual proper that allows you to obtain money or inventory equal in worth to the appreciation of a specified variety of firm shares between the grant date and the train date. The taxation of SARs is much like that of NQSOs.

LTI: long-term incentive, a proper identify for inventory and money compensation that’s earned based mostly on a time horizon, efficiency aim, or vesting interval of multiple 12 months, in contrast with short-term incentives (e.g. an annual money bonus).

OMG: Taxes

OI: unusual earnings. Wage, wages, curiosity, and kinds of earnings taxed at unusual tax charges. Most types of inventory compensation generate unusual earnings, and tax withholding applies.

CG: capital acquire, earnings that arises from the sale of a capital asset, such because the sale of shares acquired out of your fairness comp. Capital features and losses could also be short-term (held 12 months or much less) or long-term (held longer than 12 months). Brief-term capital features (STCG) are taxed on the charges of unusual earnings. Lengthy-term capital features (LTCG) are taxed at 0%, 15%, or 20%, relying in your taxable earnings in the course of the 12 months.

AMT: different minimal tax. The different minimal tax system runs parallel to unusual earnings tax. Beneath the AMT system, your different minimal taxable earnings (AMTI) is analogous in idea to adjusted gross earnings (AGI) for unusual earnings tax. Once you train ISOs and maintain the shares past the calendar 12 months of train, the unfold is a part of your AMTI and you’ll set off the AMT, relying on a lot of different components.

FICA: Federal Insurance coverage Contributions Act. Collectively, Social Safety and Medicare taxes are known as FICA taxes as a result of they’re collected beneath the authority of the Federal Insurance coverage Contributions Act. You realize them out of your paycheck and the Type W-2 you employ in your tax returns. FICA taxes, additionally know because the federal payroll taxes, apply if you train NQSOs or SARs and on the vesting of restricted inventory and RSUs.

FMV: honest market worth. The FMV of an organization’s inventory is used to find out the quantity of taxable earnings to report for an train of NQSOs and SARs and for the vesting of restricted inventory/RSUs. The FMV can also be used to set the train value of inventory choices on the grant date.

IRC: The Inside Income Code, presumably probably the most complicated tax system in human historical past, is the physique of laws that governs all federal taxation in america, together with the taxes that apply to inventory compensation. For instance, IRC Part 422 governs the taxation of ISOs, whereas Part 423 units the foundations for tax-qualified ESPPs.

NIIT: Internet Funding Revenue Tax, a 3.8% Medicare surtax on funding earnings, corresponding to capital features and dividends, when your earnings is over specified threshold quantities. This additional 3.8% tax applies on prime of the standard capital features tax (15% or 20%, relying on earnings) for taxpayers with yearly modified adjusted gross earnings (MAGI) of greater than $200,000 (greater than $250,000 for married joint filers).

FITW: federal income-tax withholding, which applies on the train of NQSOs and SARs and the vesting of restricted inventory and RSUs.

QSBS: Certified Small Enterprise Inventory. Inventory in a startup firm that permits you, beneath sure circumstances, to promote shares held greater than 5 years at a 0% capital features price. There are detailed guidelines that decide whether or not the brand new firm’s inventory, and your inventory, is QSBS.

SRF: substantial threat of forfeiture, a tax time period that applies when rights to compensation are conditioned upon future companies (e.g. working X years for an organization) or sure targets (e.g. reaching a efficiency aim or inventory value). If the situation is just not happy, the inventory is forfeited. Within the context of restricted inventory and RSUs, earnings is just not acknowledged whereas the inventory remains to be topic to threat of forfeiture (i.e. should vest).

BTW: Different Abbreviations

PTEP: post-termination train interval, the size of time you must train inventory choices after your employment on the firm ends. This era is sort of at all times shorter than the time period that may stay in case your employment had continued. It normally lasts 90 days from the termination date, however it may be a lot much less, and in case you miss the train window you can’t get the choices again. See your inventory plan and grant settlement for particulars, together with what occurs with a depart of absence (LOA).

BSM: Black-Scholes mannequin, a fancy mathematical components used to calculate the theoretical current worth of a inventory choice utilizing variables corresponding to inventory value, train value, volatility, and anticipated choice time period (i.e. the time till train). Black-Scholes is the option-valuation mannequin mostly utilized in accounting for inventory choices and in sure financial-planning instruments.

CIC: change in management. This denotes a merger or acquisition or different substantial change in shareholder possession of an organization. A change in management can set off the acceleration of vesting in inventory choices, restricted inventory, and RSUs. The specifics of what constitutes a change in management and its influence are outlined in your organization’s inventory plan paperwork.

SDS: same-day sale. In this kind of choice train, the fast sale of the underlying shares from the train generates the proceeds to pay the train value and any tax withholding. That is additionally known as a cashless train.

STC: sell-to-cover. In this kind of choice train you promote simply sufficient of the inventory to “cowl” the whole train prices (train value + taxes), with the remaining inventory held. With restricted inventory/RSUs, this is applicable to promoting shares at vesting to cowl the tax withholding.

GTC: good-till-canceled order. That is an order to promote inventory related to an train when the inventory reaches a selected value whereas the order stays open. To stop gross sales of its inventory from occurring exterior approved buying and selling home windows, some firms don’t enable this.

IPO: preliminary public providing, the method through which a privately held firm first gives its shares to the investing public, normally by means of a registration assertion beneath the securities legal guidelines. An IPO is what brings a non-public firm into the inventory market as a public firm.

SEC: Securities and Change Fee, the US federal authorities company accountable for the supervision and regulation of the securities business, the inventory markets, securities choices, and the continuing disclosure obligations of public firms in america. SEC guidelines and rules have an effect on many facets of fairness compensation and inventory possession.

MNPI: materials nonpublic info, confidential info that may transfer the corporate’s inventory value (whether or not up or down) when it’s made public. Shopping for or promoting inventory when you already know materials nonpublic info is insider buying and selling, which is illegitimate, together with insider tipping. To keep away from moving into hassle for insider buying and selling, chorus from buying and selling firm inventory when you already know MNPI.

GTK: Additional Assets

Hopefully the wealth your fairness comp or ESPP creates offers you plenty of WAFF. A full glossary of inventory compensation phrases, that includes detailed definitions, is offered at myStockOptions.com, a useful resource on all facets of inventory comp and the associated monetary and tax planning.

The glossary can also be accessible as a smartphone app: Inventory Compensation Glossary, accessible free from the App Retailer (Apple units) and from Google Play. It features a “time period of the day” and a helpful quiz. The myStockOptions web site additionally has an interactive quiz on inventory comp abbreviations the place you may check your data.