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Sensitivity Analysis Guide Essay

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Assignment #3 BLAW 502 (Summer Class I, 2013): The Richard Spellman Case
Total word count: 1724
1) Is there any need for Spellman to wade through the draft documents?
(224 words)

There is definitely the need for Richard Spellman to go through the draft documents. He needs to ensure that the employment deal that he had discussed with Walt Sawyer was in fact what the contract spelled out and that all information that has been exchanged informally, has been taken into consideration on the formal agreement.. In the “Open Items” email sent by Spellman to Sawyer, the only topic that wasn’t explained in further detail was Spellman’s base salary; further in-detail clarification was provided for bonuses, equity, and equity pool. Spellman …show more content…

By taking advantage of a Section 83(b) election, Spellman’s tax liability will be less than paying tax when the shares become vested.
As for stock options, the tax liability depends on whether the option is a nonqualified stock option (NQO) and an incentive stock option (ISO). When an NQO is exercised the tax liability will be at the ordinary income rate equal to the current fair market value minus the option exercise price. Upon sale the stock will be taxed at the capital gains rate equal to the sale of the stock minus the fair market value on date of exercise. An ISO does not have a tax consequence, though alternative minimum tax may be due. When the stock is sold, and if it had been held for more than one year from the date of exercise and more than two years from being grated, the spread will be taxed at the capital gains rate. Otherwise, the spread will be taxed as ordinary income.
Second, he wanted to ensure that his equity stake would not be diluted. Any future issuance of equity would dilute existing shareholders percentage of ownership. Therefore Spellman and Sawyer agreed to an antidilution provision that allowed Spellman’s equity to be non-dilutable by the first $35 million of financing. He would receive an additional percentage as a bonus at the initial public offering.
The last issue focused on termination of employment. Spellman wanted to outline within the

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