Business Application Consultant

Click here to view Part 1 of our series and learn more about the stock option landscape or Part 2 to learn more about the accounting and tax ramifications of issuing stock options.

What To Do?

As discussed above, there are significant risks that a company brings upon itself if it decides to issue stock options without properly valuing the options and the equity of the company. Rather than issuing stock options, if a company wants to offer an employee the opportunity to obtain an ownership interest, the most efficient and “clean” method may be to allow the employee to purchase shares from the company or from existing owners. There is no valuation requirement in this case (unless a party wants to hire an expert to ensure that they the transaction price is fair and reasonable) which also eliminates the out-of-pocket cost for the employer. In fact, a business actually recognizes a cash inflow when an employee purchases shares directly from the company. 

I am a valuation expert and I directly benefit from work associated with the valuation of stock options, so why am I telling you to consider alternative routes of compensation? Too often, the companies that issue stock options without having them professionally valued are the same companies that will fight against having their options valued at all due to the cost associated with the valuation. I simply want to spread awareness that there are other avenues of compensating employees and giving them opportunities for equity ownership that may be more cost efficient for companies that are under the illusion that issuing stock options does not require a cash outlay.

If you take anything away from this article, remember that issuing stock options is not a “cashless” expense. Consider that there are other alternatives for compensating employees other than using stock options. Remember that there are transaction costs associated with issuing stock options, specifically, hiring a valuation expert, that will create real out-of-pocket cost for any company. Unless you are ready to comply with the valuation requirements associated with issuing stock options, you may be better off simply not using them and compensating employees in another manner. Finally, just like selling a home, if you are going to issue stock options make sure that you bring in an expert to ensure that the value of the company and options are determined and documented appropriately – and be prepared to pay the “commission” for these services.

The information in this article is not meant to represent legal or tax advice. Please consult with a Skoda Minotti business valuation professional or your tax/legal advisor regarding the applicability of these issues to your particular situation.

Visit our web site for more information on our business valuation services. Skoda Minotti is a CPA, business and financial advisory firm with offices in Cleveland and Akron.

Accounting and Tax Ramifications of Issuing Stock Options

 Click here to view Part 1 of our series and learn more about the stock option landscape.

To give you more perspective, first let us review the accounting treatment for the issuance of stock options (rest easy - this will not be too painful). When stock options are issued, an expense must be recorded based on the value of the option. A stock option’s value is derived from a variety of factors, two of which are the value of the stock as of the date of the option grant and the exercise price of the option (the price at which the option holder can purchase a share of stock). Determining the value of a company’s stock is not difficult when it is publicly traded, but privately-held companies do not have readily available market prices, which necessitates the services of a valuation expert. Unless the option is properly valued, a company cannot correctly record the associated compensation expense. If a company is unable to correctly record the results of its operations, it may find obtaining a clean audit opinion to be a difficult, if not impossible, task.

Now that I have warned you about the headaches that you may encounter on the “accounting” side of issuing stock options, let me further alarm you with the tax ramifications. If a company sets the stock option exercise price lower than the fair market value of its stock on the grant date, the stock option could be deemed to be deferred compensation according to Internal Revenue Code 409A. Under 409A, such deferred compensation would be immediately taxable to the employees receiving the grant and subject to regular income tax rates plus 1%. Perhaps even more distressing, a 20% penalty plus interest would also be triggered. In addition, employers would be responsible for withholding income taxes for employees on these types of option grants, which if not done, could result in additional tax penalties. The immediate taxability, penalty and withholding requirements do not apply when the stock option exercise price is equal to or greater than the fair market value of the company’s stock on the grant date. It is impossible to compare the exercise price of a stock option to the fair market value of a company’s stock unless a valuation of the company’s stock has been performed. In addition, when a valuation has been performed to establish the fair market value of a company’s stock, the burden of proof shifts to the IRS to disprove the appraised value. Therefore, unless there is documentation to support the fair market value of a company’s stock near the option grant date, there could be significant tax issues in addition to the accounting issues alluded to earlier.

The information in this article is not meant to represent legal or tax advice. Please consult with a Skoda Minotti business valuation professional or your tax/legal advisor regarding the applicability of these issues to your particular situation.

Visit us tomorrow for Part 3: What to Do?

In the meantime, visit our web site for more information on our business valuation services. Skoda Minotti is a CPA, business and financial advisory firm with offices in Cleveland and Akron.
 

When selling your home, it is common to use an agent to list, promote and show the property. In exchange, you pay a portion of the sales price as a commission to the agent. The benefits of using an agent include: 1) the listing of your home in a database so that homebuyers can access information about it; 2) the agent acting as your middleman during the negotiation process; and 3) the incentive it gives the agent to sell your home quickly (so that her or she can earn their commission). 

Some people choose to sell their home by owner and forego using an agent. These are typically the homes that have “For Sale” signs in their yards for many months, sometimes even years (you know the ones), before they are actually sold. These people often believe that the benefit of not having to pay an agent commission on the sale of their home is worth the prolonged period it will likely take to sell the property. 

What does the choice of hiring a real estate agent or selling your home by owner have in common with private companies issuing stock options? The strange answer is: Much more than many of us realize. 

The Stock Option Landscape

More and more private companies are issuing stock options as part of their key employees’ compensation plans. This may be driven by the ideas that: 1) stock options don’t “cost” anything to the company; 2) stock options will positively influence employees’ performance; or 3) since public companies issue stock options, it must be a good idea and private companies should follow suit. Regardless of the motivation, what most private company owners and executives do not realize is that accounting for stock options, for both tax and financial reporting purposes, may actually have an out-of pocket cost that is greater than the value of the options themselves.

In order to value stock options issued by private companies, there are two major steps that must be undertaken:

1. Determining the value of the company’s equity (which is a key input to valuing a stock option)

2. Determining the value of the stock option

There are not many privately-held companies with the in-house resources or expertise necessary to perform either of the requirements above, both of which are essential in accounting for the issuance of stock options. This often puts accountants in the awkward position of trying to explain to business owners the “unseen” costs and accounting ramifications associated with issuing stock options.

Back to our analogy, hiring a valuation expert to determine the value of stock options is much like hiring a real estate agent to sell your home. A valuation expert is able to perform both of the tasks identified above that are necessary to value the stock options issued by a private company, much like a real estate agent takes care of the necessary steps to sell your home. This work is not free, however, and depending on the complexity of the company and the options issued, the cost to value a private company’s stock options can range in cost from thousands to tens of thousands of dollars. When private companies issue stock options, they often do not consider the “commission” that they will have to pay to a valuation expert to ensure that the options are properly valued. Unlike real estate agent commissions, however, which are based on the sale price of the home, valuation fees are relatively fixed. 

Just like selling a home “by owner,” some companies will issue stock options and try to determine the value themselves (or even worse, not value them at all). By not using a real estate agent, homeowners often find themselves making no headway in the sale of their home. Similarly, by not hiring a valuation expert to value the stock options that they have issued, private companies create the risk that their auditors will not sign off on their financial statements. Maybe even more importantly for business owners and employees, unsubstantiated option values leave both companies and their employees in danger of stiff tax consequences.

The information in this article is not meant to represent legal or tax advice. Please consult with a Skoda Minotti business valuation professional or your tax/legal advisor regarding the applicability of these issues to your particular situation.

Visit us tomorrow for Part 2: The Accounting and Tax Ramification of Issuing Stock Options

In the meantime, visit our web site for more information on our business valuation services. Skoda Minotti is a CPA, business and financial advisory firm with offices in Cleveland and Akron.

Welcome to the first edition of the Skoda Minotti IT E-Newsletter. At Skoda Minotti, we strive to be a resource for our clients and contacts. With that in mind, this monthly newsletter is our attempt to keep you up-to-date on what is going on in the the tech-world around us.

Each month, we will highlight a few important articles that we think you should read. Also, we'll give you a case study, or a client success story, from some of the work we've done.

If you have any questions or suggestions, please feel free to contact us.

Sincerely,
Robert Brenis, CGEIT, CISA, MCP, PMP

Brenis is a principal in Skoda Minotti's Business Applications Consulting and Technology Services Group. Reach him at rbrenis@skodaminotti.com or 440-449-6800.

FRx Discontinued; Paves Way for Microsoft's New Business Intelligence Program

Microsoft currently offers three Corporate Performance Management (CPM) programs: FRx, Forecaster and Enterprise Reporting, which aid businesses in the areas of financial reporting, planning/budgeting/forecasting, and consolidation. Starting in May 2010, the capabilities of these three CPM programs will gradually be combined into one program, Microsoft Dynamics Management Reporter, as part of an integration process that will take place over the next four years.

Click here to read more.

Popular "Scareware" Presents Virus Threat to Internet Users

A deceptive virus has been found in increasing frequency in the technology world. The scam, found in commonly visited Web sites such as the New York Times and WhitePages.com, is portrayed as an antivirus scanning program and has taken the popular names of "scareware" or "malvertising."

The virus initially appears in the form of a pop-up, resembling a typical windows message or error. The message will allude to the fact that your computer may be infected with viruses, and will give you the option to "click here to remove them." If and when you choose to click on the ad, it will appear to install an antivirus program on your computer and proceed to "scan" your system for infection. Following the scan, a message will appear claiming that there have been viruses, spyware and/or threats found within your system. Finally, the program will prompt you to purchase the "full version" of the scanning program to remove the threats.

Click here to read more.

How to Shield Your Network from Clever Hackers

You've got antivirus software and firewalls guarding your computers and routers. You religiously download security updates. You've done everything you can think of to stay secure. But your network is still at risk.

Visit the Microsoft Small Business Center to read more.

Microsoft Announces Dynamics GP Three Users for $1 Promotion

Microsoft has recently announced its "Three Users for $1" promotion, allowing all new Dynamics GP customers to purchase their first three user licenses to its Advanced Management (AM) or Business Essential (BE) programs for only $1 each. The offer will be good through the end of the business day on June 25, 2010.

Click here to read more.

• Completed a system risk assessment resulting in a recommendation to install new hardware and implement a new business system.
• Developed a detailed work plan with the vendor ensuring all major issues were addressed.
• Acted as project manager during the entire software implementation process
• Managed and installed all of their new hardware (21 workstations, two servers, various network components)

• Accurate and timely financial information
• A scaleable system that could grow with the company
• A new billing and route management system that improved critical processes

A smooth go-live process that culminated just over one month after on-site work began

• All needed data from the old system was cleaned up and converted to the new system
• All users were trained on new software
• Liberty can now independently manage all of its day-today operations using the new software

To read other Case Studies from the Skoda Minotti Technology Services Group, please click here. 

Join Us as We Introduce Microsoft Office 2010

Come and see how the new Microsoft Office 2010 can help you break through the barriers that are slowing your people down. Join Skoda Minotti for this exciting preview event.

Place:  Microsoft building
Date:  June 2, 2010
Time:  8 a.m. - 9:30 a.m.
Cost:  FREE
 

Event Schedule:
8:00 - Breakfast and Networking
8:30 - Office 2010 Presentation
9:00 - Improving Outlook Efficiency
9:15 - Q & A
9:30 - Closing Comments
 

Some of the topics we'll be discussing include:

• An in-depth look at the new features commonly used Office programs, including Word, Excel and Outlook
• Live demonstrations of several new features and benefits
• A Command Reference Guide for those users who will be making the upgrade from Office 2003 to Office 2010

Space is limited, so reserve your seat today. Click here to register online.

When you read something that says you should secure your network, most business people assume their IT people are taking care of this.  How can you be sure? Answer – you trust them.  Great, but what if they aren’t staying current with technology and are using old techniques…

You may trust them, and they may be doing what they know how to do, but you still have vulnerabilities. In a recent article in InformationWeek magazine – Greg Shipley, Tyler Allison, and Tom Wabiszczewicz write about five essential lessons they learned from real-world problems.

These lessons are:

1.      Get serious about web security.  Make sure the applications that are running on the web are secure.  Just because you have a firewall and antivirus software does not mean that someone can’t attack your web site.  If you have a web site that requires a user ID and password, how difficult (or easy) is it for someone to get access to your environment through this?  SQL injection, brute force, etc.

2.      Add Secondary Controls.  Internal firewalls, encryption, database monitoring software.  Again your internal person may tell you that yes, they are encrypting data on the database, but where is the encryption key?  If the key is on the same server as the data, what is the point in encrypting?

3.      Know your limits.  The ability of attackers is increasing at a faster rate than the ability to stop these attackers.  Even if you have up-to-date antivirus, this will not stop a custom malware.  Enable logs to provide a better view of where attackers went and to what level your environment was breached.  Just remember that they are always trying to find ways into your system and you need to be thinking about ways to keep them out.

4.      Trust but Verify.  Review any third-party system that you own or are about to implement.  Remember to change a default password when deploying anything new.

5.      Plan for incidents.  A security breach can turn into much more than the loss of some data.  Litigations can happen, and if you have rebuilt systems, wiped drives, purged sections of databases etc., finding where the problem occurred and how to prevent it in the future can be that much more difficult.

For more information on Skoda Minotti Business Applications Consulting Services, contact us at 440-449-6800.

A logo is a vital identifier that customers/prospects use to associate an organization with its products or services. The professionalism and attractiveness of a logo will immediately create a perception for the customers/prospects regarding a company’s level of integrity, product quality, player status and overall brand identity. These perceptions, right or wrong, are the factors that many customers use to measure a product or service before making a choice. A “hokey” logo can cheapen the perception of the company or product.

A few things to keep in mind when evaluating yours:

·          Overall, a logo should have a connection and association with the business image of the company or product it is representing.

·          It should be simple, short, and able to be used in a wide variety of applications, easy to remember and appear unique in a crowd of many others.

·          When designing a logo it is vital to design something that can “stand the test of time” and not require constant revisions.

·          While complex multicolor logos can be “eye-catchers,” they are not very practical. Four-color process logos are more expensive to reproduce than spot color. And they do not transfer well in applications where production requirements need to be simplified (i.e., embroidered shirt, two-color / b & w collateral). This will hurt your brand image.

·          When considering size and color it is best to select a design that can be easily reproduced and read when printed and viewed off of a fax machine, printed on brochures, business cards, letterheads or on-line.

If you feel your logo doesn’t meet with any or all of these guidelines, contact us; we are experts at taking logos from good to great.

Looking for help with your logo from a Cleveland marketing consultant? Contact Skoda Minotti Marketing Services at 440-449-6800.