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Our company is considering setting up a stock plan for our contractors. How would we go about implementing such a plan?

Answers

Patricia Boepple
Title: SVP Global Client Operations
Company: Global Shares
(SVP Global Client Operations, Global Shares) |

It depends on how far along you are in the process, and what else you have in place as far as equity compensation is concerned.

If you already have a stock plan it may be simple to modify that plan to allow for grants to contractors, or you may want to use it as a template for a new plan that just relates to consultants. First steps would be identifying why you want to give equity to contractors, and letting that guide the design, i.e., options, performance vesting, SARs, number of shares, etc. There are different IRS regulations and accounting ramifications that you will need to be aware of when granting stock to non-employees. You should be careful to ensure that your administration software can handle the ramifications, and that any other third parties, i.e., administrators or brokers are going to be able to accommodate the changes.

The basic steps are the same as any other equity compensation plan:
1) develop a plan document, including identifying the purpose of the plan, the awards types that will be granted, the number of shares to be granted, any eligibility requirements, etc.
2) make sure you understand and can comply with the legal, tax and accounting ramifications of the plan
3) make sure that all third parties involved in administering the plan are aware of the changes and able to accommodate them
4) have the Board adopt the plan
5) make sure to obtain proper approvals (i.e., shareholders, etc., as required)
6) grant awards to the contractors

Elizabeth Dodge
Title: VP
Company: Stock & Option Solutions
(VP, Stock & Option Solutions) |

I agree completely with Patricia's post, but do want to highlight the accounting impact of these grants. Many softwares cannot support the calculations, so you end up using spreadsheets to perform the calculations and, more importantly, these grants can get very EXPENSIVE and the expense is unpredictible. Grants to non-employees are not assigned a fair value at the grant date, as are grants to employees. The measurement date is instead the vest date of the grant. The fair value is assigned at that point. Up until then you do mark-to-market calculations each quarter to estimate the expense and true up and true down based on your current stock price. The expense is not fixed and cannot be predicted.

A few softwares DO support non-employee accounting, so if you haven't chosen a software yet, make sure this is high on your list of questions.

Michael VanderGoot
Title: Director of Audit
Company: BC Compliance Group, LLC
(Director of Audit, BC Compliance Group, LLC) |

When issuing stock grants for a contractor double check there are no conflicts of interest. Does the contractor have to be completely independent to avoid any compliance issues with other contracts?

There are commercial leases which require different accounting treatment of the costs passed through to a tenant (CAM and Operating Expenses) if the vendor is a related party or shares ownership with the owner of the investment.

There may be other cases as well. Some lenders scrutinize those relationships much closer; especially if they were not disclosed in the beginning.

Review your existing contracts to be sure there would be no compliance issues.

Topic Expert
Keith Perry
Title: Director of Global Accounting
Company: Agrinos, Inc.
(Director of Global Accounting, Agrinos, Inc.) |

When I have done this, it is under the normal plan, but we call them "warrants" so that nobody is confused that they might be ISOs. It requires the same board approval, but you don't need a new plan. We didn't do vesting; grants come after service has been delivered.

Tracking is pretty easy...the data you need is already collected under the 409a regs, with the exception of expiration.

Slight benefit (beyond the implicit discount in service cost you should be getting if you are granting warrants) is you do get cash for common (when they mature...keep the life of the warrants short...not 10 years).

There is of course the soft-cost impact, but if you are getting a discount that should offset to $0 (if not...just pay them in cash and be done with it).

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

Be aware such a plan will substantially increase the risk the IRS will consider the contractors employees, and pursue for you withholding and other taxes. Such an issue may also trigger reviews by your worker's comp insurer, and by the state for unemploymnet compensation taxes.

Achaessa James
Title: Product Manager
Company: National Center for Employee Ownership
(Product Manager, National Center for Employee Ownership) |

Before you issue equity instruments to your consultants, be sure to contemplate the long-term shareholder relationship that will be established by the award. Sometimes a consulting relationship can take a turn for the worse after awards have vested or been exercised, which leaves the company with a disgruntled shareholder.

Once you decide that it is worth the risk or, preferably, once the consulting project has been completed and both sides are satisfied with the work and the relationship, I agree with Keith Perry that warrants are much easier to manage than options, specifically for the reasons cited by Elizabeth Dodge, above. Another alternative, especially if you want to give the equity in lieu of payment for services rendered, is a restricted stock award instead of options. The accounting on those is even easier than warrants.

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