WO2003017164A1 - A system and method for data processing of option/share pooling, and a method for conducting business - Google Patents
A system and method for data processing of option/share pooling, and a method for conducting business Download PDFInfo
- Publication number
- WO2003017164A1 WO2003017164A1 PCT/US2001/022593 US0122593W WO03017164A1 WO 2003017164 A1 WO2003017164 A1 WO 2003017164A1 US 0122593 W US0122593 W US 0122593W WO 03017164 A1 WO03017164 A1 WO 03017164A1
- Authority
- WO
- WIPO (PCT)
- Prior art keywords
- security
- set forth
- sharing method
- holder
- risk sharing
- Prior art date
Links
Classifications
-
- G—PHYSICS
- G06—COMPUTING; CALCULATING OR COUNTING
- G06Q—INFORMATION AND COMMUNICATION TECHNOLOGY [ICT] SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES; SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES, NOT OTHERWISE PROVIDED FOR
- G06Q40/00—Finance; Insurance; Tax strategies; Processing of corporate or income taxes
- G06Q40/04—Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
Definitions
- the present invention relates generally to data processing systems, and in particular to a data processing system and method, and a method for conducting business that involves creating and managing a common pool of options, restricted stock and/or shares owned by individuals from different public companies, the shares of which are publicly traded on a stock exchange(s).
- option is typically used to refer to restricted stock or an option to acquire a share, whether vested or non-vested, and includes the concept of a warrant to acquire a share.
- the concept of acquiring a share includes acquiring such share by way of the purchase thereof, as well as acquiring such share without the need to purchase (i.e., pay for) such share.
- restricted stock refers to a share or shares which are either: (i) not publicly-tradable according to applicable law; or (ii) subject to certain restrictions with which the holder thereof must comply in order to retain such shares (or in order to avoid being subject to the issuer's discretion as to whether such holder may retain such shares).
- references herein to "shareholder,” “security holder” or “optionee” generally refer equally to a holder of a share and a holder of restricted stock, as well as a person who holds an option.
- security holder usually refers to an employee, an ex-employee, a consultant, an ex-consultant, an adviser, an ex-adviser, a service-provider, an ex-service provider, or a founder (each, an "employee”, and collectively, “employees”) of a public company who holds securities in such public company.
- public company refers to a company, the shares of which (all or some) are traded on a stock exchange.
- the purchase of restricted stock issued by a company to its employee (and/or the tax which is payable by the employee at the time of the issuance, if at all) is often being financed through the grant of a loan from the company to the employee (oftentimes, a portion of the loan is a non-recourse loan), and the purchase price of the shares is generally equal to, or less than, the fair market value of the shares (as reflected by the stock market price) on the date of the purchase.
- the fair market value (as reflected by the stock market price) of the shares of the respective public company increases dramatically from the time of the issuance/grant, the profits gained by the optionees are significant.
- the optionee employee or security holder is subject to various contractual terms and conditions which govern his options and/or restricted stock. These terms and conditions may include a vesting period during which a fraction of the granted options become exercisable upon the expiration of each pre-determined period, provided that the optionee continues to be employed by the issuer company through the end of such period; in the case of restricted stock, these terms and conditions may include a vesting period during which a fraction of the restricted stock is released from the risk of forfeiture upon the expiration of each pre-determined period, provided that the security holder continues to be employed by the issuer company through the end of such period.
- the options generally bear a per-share exercise price, i.e.
- pension plans [ooii] The core idea of pension plans is the transferring of financial assets on a periodic basis (usually monthly), which will yield cash at the age of retirement. Pension plans are highly regulated under specific legislation.
- a specific embodiment of a pension plan business model deals with the case whereby the employers transfer their own publicly traded shares or options into employee pension plans (US patent 5,806,047). This business model allows pension plans, which own employers' securities, to transfer the employers' securities into a combined pool. The pool management manages the combined portfolio, selling portions of the contributed stock and purchasing other financial instruments to increase diversification.
- pension plans are subject to restrictions which make it essential that the securities pooled be ones whose price can be determined every, day (continuously) with reasonable precision.
- the value of unvested options and restricted stock is subject to uncertainty due to the fact that the holder of the options/stock must satisfy certain conditions in the future in order to retain his eligibility to exercise/sell them.
- a mutual fund is another model that has been unacceptable with respect to unvested options and/or restricted stock in public companies.
- a mutual fund generally issues participation units through which it raises cash funds, which it then invests in liquid assets. Securities in public companies, especially if they are unvested options or restricted stock, are not in the form of cash, and therefore cannot normally be integrated within a mutual fund.
- An exchange fund enables a holder of one company's securities to transform such single-company holding into a diverse portfolio comprised of securities of numerous companies - all this while avoiding tax prior to the sale of the diverse portfolio securities.
- exchange funds While serving the function of mitigating investment risk involved with holding one security as the primary component of a portfolio, exchange funds typically offer tax benefits which may not be possible by selling the securities and acquiring a diversified portfolio.
- Exchange funds do not deal with options, nor with shares which are still subject to substantial risk of forfeiture. The funds generally accept only holders of securities having substantial market value, and they deal only with securities which are free of substantial risk of forfeiture.
- exchange funds are generally "buy and hold" portfolios intended to minimize turnover and maximize after-tax return, and U.S. exchange fund participants must satisfy certain conditions in order to achieve the tax benefits sought. Consequently, participants of exchange funds cannot redeem their respective interests (and do not receive distributions of funds) for at least a seven-year period.
- the U.S. tax regulations governing the exchange funds dictate that the fund will hold no more than 80% of its assets in stock and securities. Hedging through the use of "short " sales
- a holder of options which are vested may "sell short" the shares of the company whose options he holds. By doing so he actually gets immediate payment with a minor investment on his part. On the date when he is committed to return the shares to the lender, he may exercise his options by paying the exercise price and transfer the underlying shares to the lender.
- the transfer to the pool is effected by transferring the restricted stock or the options (as the case may be) to a management company, which will hold the restricted stock or options (as the case may be) on behalf of the pool.
- the "transfer" to the pool is effected by the security holder's undertaking to sell his participating restricted stock, options or shares underlying his participating options (as the case may be) at such time as the management company instructs him to do so, provided that such securities may be sold without restrictions at such time.
- the pool security holder would further undertake to transfer to the pool the proceeds of such sale within a certain pre-defined period, following the consummation thereof.
- the actual transfer occurs at some future time, and not at the time of joining the pool. This may have significant tax and regulatory advantages.
- the management company undertakes to sell the participating restricted stock, options or the underlying shares of the participating options (as the case may be) once they become free from any restrictions (either vesting restrictions or others, as the case may be), subject to the condition that such sale would yield a profit which is higher than a pre-defined threshold.
- the management company would be entitled to exercise discretion in determining the timing of the sale, and would not be required to effect such sale only in connection with the vesting date or with the date of being free from any restrictions and/or with a predefined threshold.
- the relative stake of each security holder, for each type of securities that he contributes to the pool is determined by a formula taking into account various parameters, including the number of participating securities of such security holder as compared with the total number of participating securities in the pool, the value of each security of such security holder's company as compared with the value of the other participating securities prior to the
- “closing" of the pool i.e. the point at which no new security holders are permitted to join the pool.
- Such value may be determined based on the price-per-share on a stock exchange at the date of the closing of the pool, the vesting terms of such security holder's participating securities (where applicable) as compared with the vesting terms of the other participating securities, any stock split or recapitalization of the securities of such security holder's company after he or she joined the pool as compared with any stock split or re-capitalization of the securities of the other security holders' companies.
- an agreement is made with the security holder obligating him to undertake to transfer the participating security to the pool management (for purposes of realizing it and distributing the proceeds) when he is no longer prevented from transferring the participating security, or the proceeds of the sale of the participating securities or the shares underlying participating options when he was instructed to do so by the management company.
- the invention being described by way of these various examples is available to employees of public companies only, another model which may be based on the present invention is a pooling method which enables pooling of both public and private (e.g.
- a unique and innovative characteristic of the invention is that it takes a very high-risk asset (i.e. non-tradable securities of a single company), and converts such asset into a lower-risk asset, reflecting a portfolio of securities of numerous companies, which statistically is designed to eliminate the absolute dependency of a security holder on the success, or lack of success, of his employing company.
- a very high-risk asset i.e. non-tradable securities of a single company
- the asset is designed to be a useful tool for employees holding securities in a target company who would like to decrease the concentration-risk involved with holdings of securities of a single company during the vesting period (or period during which substantive restrictions prohibit the sale of the securities through a stock exchange), and also for increasing the exploitation of other advantages, such as realizing gain on the portion of an option's value which is attributable to the entitlement of the optionholder to continue to hold the option through time (and which is generally calculated according to the "Black & Scholes” method), such portion being in addition to the "intrinsic" value of the option.
- a system according to the invention described herein is different from pension plans, mutual funds, VC firms, exchange funds and "short" sales in a variety of ways. Contrast with pension plans.
- Pension plans relate to periodic transfer of assets to realize returns upon retirement from a low-risk portfolio of substantially liquid assets; the present invention deals with a one-time (or limited number of times) transfer of financial assets expected to yield cash within a few years from a portfolio comprised of securities in publicly-traded companies.
- Pension plans involve the acquisition of new assets in a long-term program, but the present invention involves closing participation and the planned selling of all assets without further acquisition within a relatively short period.
- the pension plan is an "evergreen" operation, while a pool is terminated after a certain period of time.
- the core idea of a mutual fund firm is to take money and transform it into substantially liquid assets, whereas in the present invention, a participant transfers illiquid securities, into a portfolio of securities.
- the business model of a mutual fund which specializes in investment in public companies includes three types of participants: (1) the investor that provides the money to the mutual fund;
- the model of the present invention involves only two types of participants: (1) the participants in the pool who hold options/securities of their specific companies; and (2) the management firm which manages the pool.
- Mutual fund managers make investment decisions; a management company as described herein generally does not.
- a mutual fund involves liquid assets such as deposits, bonds, foreign currencies, etc., but the present invention relates to assets that may be non-liquid until their vesting or other restrictions (such as "no-sale" restrictions) lapse.
- the present invention may be available for participation by holders of securities which are less valuable.
- Exchange funds generally permit only "qualified purchasers" having net assets exceeding $5 million to participate, while the present invention does not necessarily entail such a requirement.
- the U.S. tax regulations governing the Exchange funds dictate that the fund will hold no more than 80% of its assets in stock and securities, whereas the present invention entails no such limitation.
- Exchange funds are designed to provide diversification through the exploitation of tax benefits for high net worth individuals who run the risk of an overly-concentrated portfolio, and who are not currently interested in converting their concentrated portfolio into cash.
- the present invention is designed to provide diversification to security holders who cannot currently convert their concentrated portfolio into cash (due to "vesting” and similar restrictions which prohibit the sale of their portfolio securities), but wish to increase the probability that their holdings will generate gain for them when they eventually become convertible into cash (i.e. sellable).
- the financial instrument known as "selling short” enables holders of options which have already reached their vesting to earn immediate income, while delaying most of the related expense to a later stage.
- the present invention enables holders of illiquid securities to hedge their risk prior to the lapse of the applicable vesting or other similar provisions.
- FIG. 1 is an overall schematic view of the securities common pool management system of an embodiment of the present invention
- FIG. 2 is a flow diagram describing the steps for adding new securities to the common pool. This phase is referred to as the "new investments" process;
- FIG. 3 is a flow diagram describing the steps for determining each security holder's stake determination ratio. That ratio is used to determine the security holder's stake in the common pool;
- FIG. 4 is a flow diagram describing the steps for collecting proceeds deriving from sales of participating restricted_shares and shares underlying participating options, and distributing them among the security holders of the pool;
- FIG. 5 is a flow diagram describing the steps for determining the security holder's entitlement to receive proceeds from the common pool.
- FIG. 6 is a flow diagram describing the steps for deciding on the sale of pooled securities.
- FIG. 7 is a flow diagram describing the deposit management for participants whose participating securities (or a portion thereof) are not vested at the time that proceeds are distributed to the pool's participants. DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENTS.
- a first preferred embodiment deals with non- vested options and restricted stock, either under the same pool or in a separate pool for each type of securities, and also with other types of securities or other assets such as cash, real -estate or other types of assets, which may be invested by parties who would like to participate in such pool. Such parties would participate in the pool by contributing cash, real estate assets or other assets to the pool in exchange for the receipt of a relative stake in the pool's proceeds, according to the value of the assets contributed to the pool by such participant, as determined by the management company.
- Computer systems are to be understood to include at least a memory and a processor.
- the memory will store, at one time or another, at least portions of an executable program code, and the processor will execute one or more of the instructions included in that executable program code.
- the software that enables the computer system to perform the operations described further below in detail may be supplied on any one of a variety of media.
- the actual implementation of the approach and operations of the invention are actually statements written in a programming language. Such programming language statements, when executed by a computer, cause the computer to act in accordance with the particular content of the statements.
- the software that enables a computer system to act in accordance with the invention may be provided in any number of forms including, but not limited to, original source code, assembly code, object code, machine language, compressed or encrypted versions of the foregoing, and any and all equivalents.
- media may include a diskette, a tape, a compact disc, an integrated circuit, a ROM, a CD, a cartridge, a remote transmission via a communications circuit, or any other similar medium useable by computers.
- the supplier might provide a diskette or might transmit the software in some form via satellite transmission, via a direct telephone link, or via the Internet.
- computer readable medium is intended to include all of the foregoing and any other medium by which software may be provided to a computer.
- the enabling software might be "written on” a diskette, “stored in” an integrated circuit, or “carried over” a communications circuit
- the computer usable medium will be referred to as “bearing” the software.
- the term “bearing” is intended to encompass the above and all equivalent ways in which software is associated with a computer usable medium.
- program product is thus used to refer to a computer useable medium, as defined above, which bears in any form of software to enable a computer system to operate according to the above-identified invention.
- the invention is also embodied in a program product bearing software which enables a computer to perform a risk management process according to the invention described herein.
- FIG. 1 there is shown in overall scope an operational flow chart for implementing the securities common pool management system according to a preferred embodiment of the present invention.
- the broad aspects of the system include a securities pool account and database 1, an account for handling the proceeds from the sale of the securities 2 and a data processor for managing both the database and the accounts 3.
- the pool security holders 4 manage their interactions with the pool through the various managers 5, 6, 7.
- the security holders 4 transfer securities to the common pool 1 in return for a stake in the common pool.
- the data processor 3 determines the relative stake of each security holder.
- the dashed lines depict the flow of the securities and information.
- the database and account management data processor 3 analyzes data in the securities pool account and database 1 and issues a sale instruction to the proceeds from sales manager 7 that sells the securities. Proceeds from securities are transferred to an additional account 2, and are distributed among the security holders.
- the solid lines depict the flow of the proceeds from the securities.
- a management company 9 acts as the securities pool administrator.
- the management company includes a manager for handling new investments 5 made by new and existing security holders 4.
- investment in this context refers to the addition of participating securities to the pool.
- the "new investment” process also involves the company 8 whose securities the security holder holds. We shall thereby refer to the company 8 as the "participant company”.
- the participant company will supply information, such as a copy of the agreement which subjects the security holder to certain conditions in order to retain his participating securities, for a confirmation as to the security holder's compliance with the criteria entitling him to retain the participating securities, etc.
- the management company 9 may require that certain information be confirmed by the participant company's 8 auditor or lawyer in order that such participant will receive his portion of the proceeds being distributed.
- the securities pool account and database 1 will obtain and store: (i) a daily citation of the share price of such security (or the underlying share) on the stock exchange (on which the participant company's share are traded) from the computerized data input from public stock exchanges
- the data processor for managing both the database and the accounts 3 will check relevant data in the data base and will define, based on pre- defined criteria and on then-current financial data, whether the securities should be exercised/sold or continue to be held by the pool until they meet the predefined criteria (in this preferred embodiment, the management company will sell the securities only once it is successful in obtaining a price for the options which is higher than their "intrinsic value", unless a pre-defined period has passed since the securities became sellable, in which case it may sell the options (and/or the underlying shares)/shares either immediately or in a periodical manner, for example 25% of the participating securities every 3 months).
- the management company organizes and oversees the pool in exchange for a cash payment (which, in this preferred embodiment, is calculated as a percentage of the profits or income created for the participants, in addition to annual management fees).
- a cash payment which, in this preferred embodiment, is calculated as a percentage of the profits or income created for the participants, in addition to annual management fees.
- a security holder's reports and status manager 6 will communicate with the security holders 4 and the participant companies 8 to receive updated information.
- Information will be collected about any stock split or re-capitalization after the security holder joined the pool, the status of his entitlement to options of his company at any point of time, etc. All of the information gathered will be transferred to the pool's database 1.
- Security holder information is stored in the pool's database 1. The information includes the security holder's identity, the participant company's 8 identity, the amount of participating securities for each type of securities he transferred to the pool of such security holder, the mechanism of participation (i.e.
- the value-per-security of the security holder's participating securities or shares underlying participating options (as the case may be) at the time of the "closing" of the pool (i.e. the point at which no new security holders are permitted to join the pool), the exercise price of the participating options, the vesting terms of the participating options and participating shares, the entitlement to options, the amount of proceeds collected from sales by such security holder in accordance with the rules of the pool ("pool sales"), the amount of proceeds transferred to the security holder in connection with pool sales of other security holders' participating securities and shares underlying participating options, and additional empty fields for uses that may arise in the future.
- the database 1 will store each entry with the time of the entry, and the source of the information included in the entry. New and updated entries will be stored in addition to the old entries. No entries will be overrun, and all the current and past entries will remain accessible.
- the database can be embodied by a variety of memory devices (preferably, non-volatile devices), such as magnetic storage devices, semiconductor based storage devices, optical storage devices, and even printed paper. In this preferred embodiment, a magnetic storage device such as a RAID is used. Backups are made routinely and often on a memory storage media, such as compact disks, and are stored safely, for example outside the management company's premises.
- the data processor 3 computes the stake of each security holder in the pool and controls the flow of securities/proceeds through the system. Flow diagrams describing those steps are included in FIG. 3, FIG. 4 and FIG. 5.
- the data processor in this embodiment includes a central processing unit (CPU), a non-volatile memory storage device, and IO devices such as a keyboard, scanner, printer, modem, LAN, etc.
- CPU central processing unit
- IO devices such as a keyboard, scanner, printer, modem, LAN, etc.
- a desktop personal computer running under a suitable operating system is used in the preferred embodiment.
- the controlling program can be written in several suitable languages (e.g. Visual C++, Delphi, etc.) and is preferably compiled to an executable program. Additional embodiments could utilize other configurations of hardware and software.
- the mechanism of collecting and distributing the proceeds from the sales of participating shares and shares underlying participating options is shown schematically.
- the proceeds are collected from security holders 4 in connection with pool sales or from the proceeds from sales manager 7 (if the securities were previously transferred to the pool). In this preferred embodiment, the transfer will be done through a manager 7 who will oversee the process.
- the data processor 3 On pre-determined dates ("proceeds distribution dates"), the data processor 3 will determine the relative stake each security holder has at such time. Then the proceeds of such sale will be withdrawn from the pool's account 2 and distributed among the pool security holders 4 according to the relative stake each of them has at such time.
- the management company 9 will also receive a portion of the proceeds as a management and/or success fee.
- FIG. 2 describes the steps for adding new investments to the securities pool.
- This "new investments” process refers to the adding of new securities to an existing pool. Typically this process will commence when a candidate security holder wishes to join the pool (or add additional securities to his then-current participating securities). This commencement is shown as 200 in FIG. 2. Therefore this process is defined as an "event driven” process.
- the first step 201 is to check whether the "participant" company, whose securities the candidate security holder was granted, is listed on a stock exchange (i.e., is a public company). In a preferred embodiment, only employees of companies whose shares are listed on selected stock exchanges (“approved”) will be entitled to join the pool.
- the second step 202 is to check whether the company's market cap exceeds a certain minimum amount. These two steps ensure that the participant company is perceived by the investing public to be a worthwhile investment; therefore, from a statistical perspective, such company should have a higher probability of achieving business success, as compared to other companies, which are not perceived by the investing public to be a worthwhile investment.
- the management company 9 will create and update the list of "approved stock exchanges".
- Other embodiments may include different requirements.
- another embodiment is a pool specializing in second-tier stock exchanges.
- Another example is an embodiment that will not be limited to employees of companies, the market cap of which exceeds a certain limit, but will also be available to employees of participant public companies with any market cap.
- Step 203 verifies that the value (as described in figure 3) of the participating securities that the candidate wishes to transfer is above $10K and below $200K.
- the lower limit is introduced in order to avoid dealing with small amounts, which is not worthwhile from the point of view of the management company.
- the upper limit is introduced in order to verify that no security holder can become rich solely from his holdings in the pool. This protects the participant companies from security holders becoming rich and losing interest in working hard for the benefit of their companies.
- step 203 may be discarded.
- Step 204 verifies that the security holder will transfer no more than 20% of his holdings in the participant company. This mechanism assures that at least 80% of his holdings are still linked to the success of his participant company. This is designed to motivate the security holder to try and make his participant company a business success. In the case of a single security holder making multiple investments, all of the above-described steps refer to the sum of his current and past investments. In another embodiment, a different percentage or package value may be set instead of 20%, or no limitation at all may be set. [0069] Approval of the new investment 210 is given only if a positive output was received from all the previous steps 201,202,203,204. Otherwise the new investment is denied 280. In an additional embodiment the management company could exercise subjective discretion with respect to the acceptance or non-acceptance of a candidate security holder.
- the new investment manager 5 and the security holder 4 will determine whether the participating securities are transferable/assignable in accordance with the terms and conditions governing such securities. If the securities are transferable/assignable, then they may be transferred/assigned to the common securities pool 220.
- the security holder may instead undertake an undertaking to sell the participating securities and the shares underlying the participating options once they become vested/sellable/exercisable or in accordance with instructions he may receive from the management company, and transfer the proceeds to the management company in order to allow for the distribution thereof at a proceeds distribution date 230.
- the participant may provide his employing company or a trustee an irrevocable letter instructing it or him (as the case may be) to transfer the securities/proceeds to the pool on a certain event/date.
- Other embodiments may include different acceptance criteria. For example, a value of participating securities exceeding $50K and less than $150K, and or that the percentage of holding transferred to the pool is anything between
- Step 290 marks the end of FIG. 2 and refers us to FIG. 3.
- Step 290 Please note that the new investments manager 5 oversees the entire "new investments" process.
- FIG. 3 a flow diagram describing the stake determination algorithm is shown.
- the algorithm starts at step 300, which can be viewed as a continuation of step 290 from FIG. 2.
- the actual computations begin only after the pool 1 has been closed for new investments 310.
- the pool will be closed to new investments either because an "event driven trigger” such as reaching a certain number of security holders in the pool, or because a "time driven trigger” such as the arrival of a pre-determined date.
- the pool will close after fifty security holders have joined. In other embodiments this number may be a larger number or a smaller number, provided however, that the number must be sufficiently large to ensure an adequate statistical basis.
- a limitation will be set such that only a limited percentage of the overall value of the pool (as determined at the time of the closing of the pool) may be linked to a particular company (e.g. the securities of each company may represent no more than 8% of the overall value of the pool). This limitation is based on the desire for the pool to represent a wide range of target companies, thereby increasing the statistical chances of achieving return.
- the first step 301 is to load the data required for the calculation of the appraised value of the security holder's participating securities at the time the security holder made his investment (as shown in FIG. 2) and at the time of the closing of the pool.
- data may include for example, the price-per-share as listed on the relevant stock exchange, the exercise price, the vesting terms, and other terms and conditions which apply to an option.
- the second step 302 is the appraisal of the "value" of the participating securities, which, for purposes of appraising options, may be based on a "Black and Scholes" formula with or without required adjustments.
- a "Black and Scholes” formula For different types of securities, such as restricted stock, or in other embodiments, another evaluation method may be used.
- the original value of a particular security will be referred to as the "original value” of such security. Later changes in the value may occur due to changes in the share price on the relevant stock exchange, stock splits or re-capitalizations. In this embodiment, changes in the "original value" of a security holder's securities will be accepted until such time as the pool is closed to new investments.
- This mechanism assures the security holder, that changes with respect to his company's value (and consequently the value of his participating securities) that occurred between his mvestment and the closing of the pool, will always work in his favor (i.e. they can only increase his stake in the pool, and not decrease it).
- This updated value will be referred to as the "updated value”. In another embodiment, there will be no "updated value”.
- the evaluation of the securities is performed before the pool is closed to participation by other security holders. Although it is possible and foreseen that the evaluation of the securities could be delayed until only after the pool is closed to other participation by other security holders, it will be appreciated that participants may wish to know the evaluation of their securities for purposes of participation in the pool before the closing of the pool. A pre-closing evaluation is thus preferred.
- the Value-Per-Security ("VPS") 303 for each type of securities is then taken as either the "original value-per-security" or the "updated value-per- security", whichever is higher. In another embodiment, there will be no updated value-per-security.
- the VPS will be used as an auxiliary variable in the subsequent steps.
- the Number Of Securities (NOS) 304 is defined as the total number of securities that the security holder has invested in the common pool. As explained in the preface, in this embodiment, each security holder may invest different types of securities (i.e. restricted stock and options), and different types of options (e.g., different exercise price, vesting periods, etc.) and each type of security will be assigned its own VPS and NOS.
- the NOS also serves as an auxiliary variable, which indicates the full potential size of the security holder's investment, in terms of the number of securities.
- the theoretical monetary value of the security holder's investments is computed. This is the theoretical value at the point of time that the pool has been closed for new investments.
- MIIV Initial Investment Value
- the MIIN is computed by multiplying the ⁇ OS by the VPS for each type of securities and for each security holder.
- the Members Stake Determination Ratio (MSDR) 370 is the theoretical stake that the security holder will have in the pool for each type of securities he transfers to the pool.
- FIG. 4 and FIG. 5 both cover such issues and definition in detail.
- the MSDR is computed in step 370 separately for each type of securities a member transferred to the pool by dividing every MITV of securities of the individual security holder by the sum of all the MIIV's of all of the pool security holders. Please note that the definition "all the pool security holders" also includes the individual security holder himself.
- the overall initial value of the securities transferred by each member in the pool is the sum of all his MIIV in all type of securities.
- the MSDR and/or MIIN are computed without first calculating the VPS and / or ⁇ OS. This approach is beneficial for security holders without accurate information about their securities, or without means to prove the reliability of such information. In those cases it may be difficult to compute the VPS / ⁇ OS / NOES.
- An alternative approach is to use heuristics. For example every security holder participates with respect to 10% of his respective securities, and the MIIV is determined as 1 for every participant.
- This model is very naive, and can be greatly improved upon by taking into account information about the participating securities (absolute number or as a percentage from the total securities per security holder or from the total securities of the company), information about the security holder (education, work experience, salary, job description, curriculum-vita, time of joining the participant company, organizational position etc.), information about the "participant" company ( field of operation, financing information, business and R&D milestones, subjective evaluation of the companies value and potential, etc.), and the relationship between all those factors at different time points (at the time of joining the pool, at the time of the security holder receiving his securities, etc.).
- NOS NOS, VPS- for each type of securities contributed by a particular participant, a different value will be saved) are stored in the non-volatile database 1.
- the values are stored in the individual security holder's personal file, since all of such values are computed individually for each security holder. It is important to note that all of such values may vary from security holder to security holder. The only constant value is the sum of all the MSDRs of all the security holders, which is always equal to one. [0083] Once all the values have been computed and stored, it is time to move on to the proceeds collection and distribution phases 390.
- step 400 (every six months). The beginning of the process is shown in step 400.
- a sale of participating securities (see Fig. 6 - description of sale procedure), will trigger a transfer of money from the security holder to the pool 401.
- the process of collecting the proceeds is supervised by the "proceeds from sales manager" 7, and will now be discussed in detail.
- the security holder could either transfer/assign the securities to the pool 220 or undertake to transfer the proceeds in the event of a pool sale by such security holder 230. If the securities have been transferred to the pool 220, then the management company 9 will sell them in connection with the lapse of the vesting or other restrictions and/or compliance with pre-determined conditions as determined in Fig. 6, or otherwise at the discretion of the management company. The proceeds will then be transferred to the "account of proceeds from sales" 2. If the security holder has undertaken to sell his securities or the shares underlying his participating securities, then the security holder will transfer the proceeds from his sale, as instructed to sell by the management company, to the pool's account 2.
- the exercise price of a security holder's participating options will be paid to his company by the security holder in order to exercise the option.
- the security holder will transfer to the pool the proceeds already net of any due payment or tax, if applicable. Therefore, effectively, the pool receives the proceeds as if there is no exercise price.
- the pool management will finance the payment of the exercise price by providing such payment to the security holder. This is best when the exercise terms of the options are incorporated into the evaluation process of the "value-per- security".
- the proceeds are collected in the proceeds account 410.
- the management company's fees are deducted from the proceeds transferred to the proceeds account.
- the management fees would consist of an annual management fee in the range of 3% per-annum, calculated on the basis of the participant's MIIV of the participating securities as determined at the time of joining the pool, but would only actually be paid only once there are proceeds from which the annual fees may be deducted.
- a success fee in the range of 20%, calculated on the difference between the actual distributions to a participant and the original MIIV at the time the participant joined the pool.
- only success fees may be charged, or only annual fees will be charged.
- the annual fees may be paid in cash.
- the level of the fees could be different than 3% and 20%.
- AOPFD is deposited until the next periodical distribution among the security holders.
- the distribution process is "time-driven”; in a preferred embodiment it is performed every six months.
- the first step in the distribution process is to load 411 the MSDR and NOS, which are stored in the pool's database. Please recall that each security holder may have more than one
- MSDR and NOS values due to contribution of more than one type of securities.
- the next step 420 is to compute the "Member's Amount Of
- MAOP The MAOP is the portion of a member in the proceeds to be distributed.
- the MAOP will be calculated by multiplying the AOPFD by the
- MSDR MSDR.
- a member may have more than one MSDR, so that the calculation will be conducted for each MSDR separately.
- the next step 421 is to determine the Number Of Entitled Securities (NOES).
- the Number of Entitled Securities is the number of securities of such security holder that will be considered when the proceeds are distributed. For example, if the security holder has lost all of his stake in the pool (for reasons explained in FIG. 5) then the NOES is zero.
- the determination of the NOES is a complex process that will be discussed in detail later on with the assistance of FIG. 5. Please note that the NOES is calculated separately for each type of securities of each security holder who transferred to the pool more than one type of securities.
- MEAOP the Member's Entitled Amount Of Proceeds
- the MEAOP is the amount to be distributed to each participant and is computed as the quotient of (MAOP X NOES) divided by NOS. Please note that this calculation will be made for each type of securities (and therefore for each MAOP, NOES and NOS) of a specific security holder who has contributed more than one type of securities.
- the next step is 423, which refers to depositing some of the proceeds.
- a calculation is made to define the amount of proceeds which should not be distributed to the participants at such stage.
- the amount which should not be distributed at such stage is the difference between the MAOP and the MEAOP. This amount will be deposited until a later stage as detailed in FIG. 7. Please recall that each security holder may have more than one MAOP and MEAOP values due to contribution of more than one type of securities.
- the MEAOP is transferred to the security holder 490.
- the money is transferred to the security holder's bank account.
- a printed report is also sent by mail (or E-mail) to notify him of this transfer.
- This transfer may represent a major benefit to the security holder, as he realizes an actual monetary gain, even if is his own company failed and all of his securities are now utterly worthless.
- the Number of Entitled Securities is the number of securities of such security holder that will be considered when the proceeds are distributed.
- the NOES represents an important aspect of this preferred embodiment, as it serves as a mechanism for dealing with the variable legal and business characteristics of the different security holders. The mechanism will become clear after reviewing the detailed descriptions set forth in the following paragraphs.
- FIG. 5 represents a detailed explanation of step 421 of FIG. 4. Therefore it is actually an internal subroutine of the proceeds distribution process.
- a preliminary step 501 of loading the NOS is performed. During this step, the file containing all the security holder's records is opened for easy future access.
- step 520 an additional mechanism is discussed. Before the proceeds are distributed to a particular security holder, such security holder will have to prove that he is still entitled to his participating securities even if such securities remain subject to vesting or similar restrictions.
- the proof required is a letter signed by the participant company and confirmed by its attorney or accountant. The letter will be examined by the security holder's reports and status manager 6, who will enter his approval to the participant's database. The entry (like all the entries made by the management company's personnel) will include a time stamp. Such proof is required whenever proceeds are distributed (which is every 6 months in an embodiment).
- NOES If the security holder has lost his entitlement to all of the participating securities, the NOES will be determined as zero 521. This means that the security holder will not be entitled to any proceeds from the pool. Note that the NOES is re-computed whenever proceeds are distributed. Please note that this step would be performed separately for each type of securities for each security holder.
- Vesting terms are a common practice in employee equity- incentif ⁇ cation plans, and are treated in the following step 530.
- the portion of the participating securities that the security holder holds in the participant company and are already vested (or no longer subject to substantial risk of forfeiture) to him at the time of the proceeds distribution, will be referred to as P_VESTED.
- P_VESTED is a fraction, so for example when 25% percent of the participating securities that the security holder holds in the participant company are already vested (or free from substantial risk of forfeiture) to him, the P_VESTED is equal to 0.25.
- the computation is done on the different types of securities in a similar manner, but each of them will get a separate value.
- the actual Number of Entitled Securities is the number of participating securities that were already vested (or free from substantial risk of forfeiture) to the security holder.
- the NOES can be computed by multiplying the NOS by P_VESTED, as shown in step 531.
- the issue of vesting may be dealt with by reflecting the relevant vesting provisions in the evaluation of the securities (e.g., the VPS in steps 301 and 302). In such other embodiment, steps 530 and 531 may be unnecessary.
- step 590 stores the NOES, for each type of securities of each security holder, and returns the NOES to the calling program (which is described at FIG. 4).
- the process start 600 is executed in a daily manner for all pooled securities.
- the first step is to check whether the vesting date (i.e. the date on which the vesting restrictions lapse or the date on which the stock becomes freely transferable by the holder) is prior to the then- present date. In the case of stock which is non-restricted stock, the result of this check will necessarily be a positive result. If the vesting date is after the then- present date, then the percent of securities which should be sold is set to zero 606 and the process ends 690. If the vesting period has already passed, then the answer is yes, meaning that the securities are generally liquid and sellable.
- the securities are not sellable; for example, during a "lock-up period" during which shareholders of a company that effected a public offering of its securities are prevented from selling their company securities for a period of time agreed upon with the underwriter. Therefore, if it is determined that the options are vested (i.e. the vesting restrictions have lapsed or the holder of the stock is not subject to transferability restrictions due to a "vesting" schedule), then another general examination as to any other constraints relating to the securities is made in step 607. If there are other constraints which prohibit sales, then no securities may be sold at this date and the percent of securities to be sold is set to zero 608.
- the system reads 4 parameters 640: the exercise price per security (EPPS), two types of data regarding the price-per-security and a percentage which would be defined as the Threshold.
- EPPS exercise price per security
- the EPPS is taken from the Security Pool Account & Database under the data stored for this security at the time of the joining of the security holder to the pool.
- the second input is the most updated price-per-security, or the price per the underlying security (as the case may be) as quoted on the relevant stock exchange.
- This input will be defined in this document as Current Market Price Per Security (CMPPS) and is being taken from computerized data input from the relevant public stock exchanges 10.
- CMS Current Market Price Per Security
- the second data input which will be defined as the Current Maximum Bid Price Per Security (CMBPPS) is taken from Offering Data Base 11 which stores data relating to offers offered to the pool management company 9 by various investors who are interested in buying participating securities or securities underlying participating securities, as the case may be, directly from the pool, at a price which is higher than the then-current market price of the respective security.
- the Threshold percentage is a specific number, which is defined by the management company in advance and will be explained in detail in step 665 below.
- the next step 650 is to compute the Current
- CIV Intrinsic Value of the option
- CBSV Current Black & Scholes Value
- the next step 660 is to compute the difference between the CBSV and the CIV of the option, which will be defined as the DELTA.
- step 665 a comparison will be made as presented in step 665 with respect to the option.
- the system will check whether the CMBPPS is higher than the sum of the CIV plus a number equal to the Threshold percentage multiplied by the DELTA.
- This calculation actually checks if the maximum price at which the management company can sell the option to a prospective buyer who submitted an offer to purchase the option from the pool, includes at least part of the difference between the value attributed to the option by using the "Black & Scholes" evaluation methodology and the intrinsic value of the option, thus enabling the participant to enjoy another benefit (in addition to the diversification benefit).
- the minimum required addition is calculated by using a certain Threshold percentage, in the preferred embodiment 30%, multiplied by the difference between the CBSV and the CIV, which means that the sale will be made at a price which includes a "premium" of at least 30% of the DELTA in excess of the profit it would have generated if the option were exercised by the pool and the underlying security were sold by the pool on a stock exchange. If the required additional amount is obtainable, then the system would generate a sale command to the proceeds from sales manager 7 for 100% of the participating options 661 of such security holder, and the process would then end 690; otherwise, the next step would be 670.
- Step 670 includes an examination as to whether the current date (CD) is more than a fixed period of time (in the preferred embodiment, this period is two years) beyond the vesting date (VD). If the fixed period of time has not yet passed, and the options expiration date is not within the subsequent calendar quarter (or any other period as is pre-defined by the management company), then no sale will be executed 671 and the process ends 690. If the fixed period of time has passed, then the next step is 680, in which an examination is made to see whether either the CMPPS or the CMBPPS is higher than the EPPS. This test checks whether the maximum selling price that the management company can sell the underlying securities, either through a stock exchange or through an investor who offered a better price, is greater than the exercise price of the option.
- a fixed period of time in the preferred embodiment, this period is two years
- VD vesting date
- the system will generate a sale command for all the securities 681 and the process will then end 690.
- the algorithm can be defined in a way that 25% (or any other percentage) will be sold and the following sale would be a quarter (i.e. three months; or any other time period) later.
- OIVPS Original Intrinsic Value Per Security
- MSPPS Maximum Sell Price Per Security
- the system reads four parameters: the original VPS of the stock, a percentage which is pre-defined by the management company as the Minimum Stock Sale Percentage (MSSP), the CMPPS and the CMBPPS.
- MSSP Minimum Stock Sale Percentage
- the MSSP could be any percentage fixed by the management company, including percentages which are greater than 100% or less than 100%.
- the system then checks whether the greater of the CMPPS and the CMBPPS is higher than the product of the VPS and the MSSP.
- the next step would include an examination as to whether the current date (CD) is more than a fixed period of time (in the preferred embodiment, this period is two years) beyond the vesting date or of the date the holder of the stock is not anymore subject to transferability restrictions due to a "vesting" schedule (VD). If the fixed period of time has not yet passed, then no sale will be executed and the process ends. If the fixed period of time has passed, then the next step would entail generating a sale command for 100% of the relevant participating stock, and the process would end.
- Fig. 7 describes the deposit management. This algorithm is being applied for each type of securities of each participant separately. As explained in Fig. 4 (step 423), the amount which is the difference between MAOP and MEAOP is deposited in a central account(s) and awaits the expiration of the respective "vesting" restrictions of those securities which were included in the calculation of the MAOP but not included in the calculation of the MEAOP due to the fact that they were not "vested" when the MEAOP was calculated. This amount is deposited for the benefit of a particular participant whose participating securities,, or at least a portion of them, were not vested at the time of the last distribution of proceeds. In the preferred embodiment, distributions of proceeds occur once every six months due to administrative considerations.
- Another embodiment would entail distributions as soon as practicable after proceeds from sale would flow to the pool (i.e. the central accounts) mentioned above). After six months (or any other pre-determined period), an examination would be made as described in detail below, in order to ascertain whether securities which were unvested at the date of the last proceeds distribution, became vested during the period which elapsed between the last proceeds distribution and the date of the then-contemplated proceeds distribution. The relative portion of the deposit which correlates with the portion of the securities which became vested during the above-mentioned period would therefore be released to the respective participant at the time of the subsequent distribution.
- Step 700 starts the deposit management process.
- Step 710 the Current Number Of Unvested Securities (CNOUS) is being computed.
- the CNOUS is the difference between NOS and NOES.
- step 720 an examination is being made with respect to the "age" of the deposit, i.e., whether it's a new deposit or not.
- step 740 which is the Last Number Of Unvested Securities.
- This term which will be better understood after the reader reads step 760, is designed in order to define the number of unvested securities at the last deposit management process, which in the preferred embodiment was executed six months before the current process. It represents the number of the securities of the particular participant which were unvested at the time of the last round of proceeds distribution.
- Step 750 includes the calculation of the Percent Of Deposit To Free
- step 760 a new LNOUS value is set to equal the CNOUS such that in the next distribution round, the CNOUS would be the LNOUS for the next round.
- Step 790 ends the process by determining the amount of the deposit which should be distributed to the participant out of the participant's overall deposited amount. The amount is calculated by multiplying the participant's total deposit by the PODTF, which reflects the portion of the deposit which is attributed to the securities which became vested during the period which elapsed between the last distribution process and the current distribution process. 0122]
- a pool may be created for shares only, for options only, for vested shares/options only, for unvested securities only or for any similar sub-category or combination.
- the pool could be limited to shares/restricted stock options of companies in a pre-determined field of activity or a combination of pre-determined fields of activity, such as biotechnology, internet technology, computer technology, communication technology, etc.
Abstract
Description
Claims
Priority Applications (1)
Application Number | Priority Date | Filing Date | Title |
---|---|---|---|
PCT/US2001/022593 WO2003017164A1 (en) | 2001-08-10 | 2001-08-10 | A system and method for data processing of option/share pooling, and a method for conducting business |
Applications Claiming Priority (1)
Application Number | Priority Date | Filing Date | Title |
---|---|---|---|
PCT/US2001/022593 WO2003017164A1 (en) | 2001-08-10 | 2001-08-10 | A system and method for data processing of option/share pooling, and a method for conducting business |
Publications (1)
Publication Number | Publication Date |
---|---|
WO2003017164A1 true WO2003017164A1 (en) | 2003-02-27 |
Family
ID=21742707
Family Applications (1)
Application Number | Title | Priority Date | Filing Date |
---|---|---|---|
PCT/US2001/022593 WO2003017164A1 (en) | 2001-08-10 | 2001-08-10 | A system and method for data processing of option/share pooling, and a method for conducting business |
Country Status (1)
Country | Link |
---|---|
WO (1) | WO2003017164A1 (en) |
Citations (2)
Publication number | Priority date | Publication date | Assignee | Title |
---|---|---|---|---|
US6078905A (en) * | 1998-03-27 | 2000-06-20 | Pich-Lewinter; Eva | Method for optimizing risk management |
US6269346B1 (en) * | 1992-09-01 | 2001-07-31 | Merrill Lynch, Pierce, Fenner & Smith | Stock option control and exercise system |
-
2001
- 2001-08-10 WO PCT/US2001/022593 patent/WO2003017164A1/en active Application Filing
Patent Citations (2)
Publication number | Priority date | Publication date | Assignee | Title |
---|---|---|---|---|
US6269346B1 (en) * | 1992-09-01 | 2001-07-31 | Merrill Lynch, Pierce, Fenner & Smith | Stock option control and exercise system |
US6078905A (en) * | 1998-03-27 | 2000-06-20 | Pich-Lewinter; Eva | Method for optimizing risk management |
Similar Documents
Publication | Publication Date | Title |
---|---|---|
US6112188A (en) | Privatization marketplace | |
Samuels et al. | Observations on the Taxation of Global Securities Trading | |
Riggs et al. | Mutual Funds: A Banker's Primer | |
Abbott et al. | Implications of the 2012 JOBS Act for Investors. | |
Myers | Directed Brokerage and" Soft Dollars" Under ERISA: New Concerns for Plan Fiduciaries | |
AUSTRALIA | Information memorandum | |
Collings | Interpretation and application of UK GAAP: For accounting periods commencing on or After 1 January 2015 | |
Loader | Fund Custody and Administration | |
WO2003017164A1 (en) | A system and method for data processing of option/share pooling, and a method for conducting business | |
Morgan et al. | Common stock | |
EP1212710A1 (en) | A system and method for data processing of option/share pooling, and a method for conducting business | |
Lessambo | Short-Term Assets: Cash and Cash Equivalents | |
Class et al. | Financial highlights | |
Portfolio et al. | No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. | |
Ackerman | Innovative Uses of Employee Stock Ownership Plans for Private Companies | |
Audit et al. | Investment Companies | |
Securities | The Charles Schwab Corporation | |
Bravo | Securities Exchange Act of 1934 | |
MARINI | SECURITIES EXCHANGE ACT OF 1934 | |
Murphy | ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS PURSUANT TO SECTION 203 (f) OF THE INVESTMENT ADVISERS ACT OF 1940, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS | |
Fund | Private Placement Memorandum | |
Katz | SECURITIES EXCHANGE ACT OF 1934 | |
Petersen | Optimizing retirement funds: an institutional perspective | |
Guides | Investment companies, May 1, 2013; Audit and accounting guide | |
D'Alelio | INVESTMENT COMPANY ACT OF |
Legal Events
Date | Code | Title | Description |
---|---|---|---|
AK | Designated states |
Kind code of ref document: A1 Designated state(s): AE AG AL AM AT AU AZ BA BB BG BR BY BZ CA CH CN CO CR CU CZ DE DK DM DZ EC EE ES FI GB GD GE GH GM HR HU ID IL IN IS JP KE KG KP KR KZ LC LK LR LS LT LU LV MA MD MG MK MN MW MX MZ NO NZ PL PT RO RU SD SE SG SI SK SL TJ TM TR TT TZ UA UG US UZ VN YU ZA ZW Kind code of ref document: A1 Designated state(s): AE AG AL AM AT AU AZ BA BB BG BY BZ CA CH CN CO CR CU CZ DE DM DZ EC EE ES FI GB GD GE GH HR HU ID IL IN IS JP KE KG KP KR LC LK LR LS LT LU LV MA MD MG MN MW MX MZ NO NZ PL PT RO RU SE SG SI SK SL TJ TM TR TT TZ UA US UZ VN YU ZA |
|
AL | Designated countries for regional patents |
Kind code of ref document: A1 Designated state(s): GH GM KE LS MW MZ SD SL SZ UG ZW AM AZ BY KG KZ MD TJ TM AT BE CH CY DE DK ES FR GB GR IE IT LU MC NL PT SE TR BF BJ CF CG CI CM GA GN GQ GW MR NE SN TD TG Kind code of ref document: A1 Designated state(s): GH GM KE LS MW MZ SD SL SZ TZ UG ZW AM AZ BY KG KZ MD RU TJ TM AT BE CH CY DE DK ES FI FR GB GR IE IT LU MC NL PT SE TR BF BJ CF CG CI CM GA GN GQ GW ML MR NE SN TD TG |
|
DFPE | Request for preliminary examination filed prior to expiration of 19th month from priority date (pct application filed before 20040101) | ||
121 | Ep: the epo has been informed by wipo that ep was designated in this application | ||
REG | Reference to national code |
Ref country code: DE Ref legal event code: 8642 |
|
32PN | Ep: public notification in the ep bulletin as address of the adressee cannot be established |
Free format text: NOTING OF LOSS OF RIGHTS PURSUANT TO RULE 69(1) EPC (EPO FORM 1205A DATED 23.06.2004) |
|
122 | Ep: pct application non-entry in european phase | ||
NENP | Non-entry into the national phase |
Ref country code: JP |