Stock Options

Incentive Stock Options

Incentive stock options (ISOs) are granted under Section 422 of the Internal Revenue Code and are intended to qualify for special treatment available under Section 422. U.S. optionees generally are not required to include any amount in income for regular tax purposes as the result of grant or exercise of an ISO award, provided that they also meet the holding requirements.

Non-Qualified STock Options

Non-qualified stock options (NQSOs) do not qualify for the same special tax treatment accorded to ISOs. ISOs are only available for employees and other restrictions apply for them. The difference between the exercise price and the market value at the time of exercise ("spread") will be taxable at exercise.

Stock Option Grant

An option gives you the right to purchase ("exercise") a specified number of shares of stock at a fixed price per share (the "exercise price") that is paid to Upstart at the time the option is exercised. Options vest over a period of time (the "vesting period") and are generally exerciseable once vested.

Vest

Vesting is the process by which an employee earns his/her Upstart equity. It generally occurs over time. For instance, stock options vest over time, meaning you earn the right to exercise options over a specified period of time as long as you remain employed with the company.

Exercise Price

The exercise price (or "strike price") is the amount you pay Upstart per share if/when you exercise your options. It is equal to the fair market value of the stock on the option grant date. The exercise price is fixed for each option and does not change regardless of changes in the fair market value of the stock. The exercise price for your option will be listed under "Exercise Price per Share" in your Notice of Stock Option Agreement. You can also see it in Charles Schwab.

Exercise

You pay Upstart the strike price (set by the option) to purchase shares. Generally, only options that are vested can be exercised.

Exercise Methods

(1) Cash Exercise: You pay the exercise price (and any applicable taxes and fees) in cash and receive shares. The exercise price is the strike price set multiplied by the number of shares you exercise. You can complete a cash exercise at anytime (including during Blackout Periods) but you can only sell the resulting underlying shares during an open trading window.

(2) Same-Day-Sell: Options are simultaneously exercised and sold. The exercise price and applicable taxes (if any) are withheld from the sale transaction and you receive the remaining proceeds in cash.

(3) Sell-To-Cover: A sufficient amount of options are simultaneously exercised and sold. The exercise price and applicable taxes (if any) are withheld and your receive the remaining proceeds in shares.

Qualifying vs. Disqualifying Dispositions (Incentive Stock Options only)

Qualifying Disposition: If the statutory holding requirements have been met elapsed, any gain recognized from the exercise generally will be taxable at long-term capital gain rates.

Disqualifying Disposition: A disqualifying disposition (sale) is the sale of stock that does not meet the statutory holding requirements of holdings the shares for at least two years from grant date and one year from exercise.

Upon engaging in a disqualifying disposition, compensation income is recognized unless the shares are sold at a loss. Compensation income is taxed as ordinary income. You will recognize compensation income equal to the lesser of the following two amounts:

(1) The gain at the time the option was exercised, calculated as the difference between the fair market value on the date of exercise and the amount paid to exercise the ISO.

(2) The actual gain on the sale, calculated as the difference between the gross sales price and the amount paid to exercise the ISO.

Taxes

ISOs: Upstart will not withhold taxes at the time you exercise your incentive stock options, as the exercise of incentive stock options (ISOs) is generally not a taxable event if you are completing a cash exercise. A same-day-sale and sell-to-cover (sell portion only) are disqualifying dispositions as the shares are exercised and sold simultaneously and therefore do not meet the holding requirements. The spread between the sale price and the strike (exercise) price is taxed at your ordinary income tax rate. As a company we are not obligated to withhold tax for ISO exercises, so you will receive a Form 3921 with the translation details to utilize when completing your taxes.

NQSOs: In most countries, the difference between the exercise price and the market value at the time of exercise ("spread") will be taxable at exercise. Generally, Upstart will withhold your estimated tax liability from your cashless transaction (exercise and sell; sell-to-cover). The amount withheld will be remitted to the IRS on your behalf. For cash exercises (exercise and hold) you will be responsible for funding your Charles Schwab account with your exercise cost and tax liability. The tax rate at which your liability is estimated will be based on supplemental income tax rates.

Leaving Upstart

Stock options that are vested and exercisable must be exercised within 3 months following your termination date. If they are not exercised within the 3 month time period the vested exercisable options will be cancelled. Unvested stock options are forfeited as of your termination date.

If you were granted stock options before our IPO, you may have a different period of time to exercise those vested stock options after your last day of employment. Please consult your stock option agreement for those pre-IPO stock options for more details.

You can find more information about stock administration here.