Equity Education: EEF0 US Participants (Profits Interests)

Summary

This session focused on the EEF0 US Participants Profits Interests Plan, explaining its mechanics, eligibility, and taxation. Hosted by Megan Jagish from IOG and Dan Coleman from Infinite Equity, the webinar served as a comprehensive guide for US-based employees and service providers hired before December 31st, 2023. Attendees were introduced to the core principles of the plan, its tax implications, and the potential value it holds. An emphasis was placed on understanding complex terms such as vesting, capital accounts, and 83b elections, keeping the future tax efficiency in focus. The session concluded with Q&A, highlighting the plan's strategic benefits and forthcoming educational resources.

Highlights

• The EEF0 plan ties incentives directly to IOG's performance and aligns with their long-term goals. 🎯
• Participants will benefit from potential capital gains taxed more favorably than ordinary income. 💸
• Equity offerings are seen as part of a comprehensive rewards package that integrates performance and retention strategies. 🎁
• The plan is described as generous compared to market standards, prioritizing participants' financial benefits. 🏆
• Future sessions and tools, such as the equity calculator, will provide further insights and facilitate better understanding. 🔍

Key Takeaways

• The EEF0 plan is designed for US-based employees hired before December 31st, 2023, offering them a stake in IOG through equity. 🇺🇸
• Vesting is tied to the hire date, making it participant-friendly for earlier hires. ⏳
• 83b election is crucial to convert potential ordinary income into long-term capital gains, optimizing tax efficiency. 📉
• Profits interests involve no upfront cost and are retained even after leaving IOG, once vested. 💼
• The fund's life cycle includes creation, growth, and liquidation phases, each with unique benefits and considerations. 🌱

Overview

The EEF0 profits interests plan is a strategic initiative aimed at offering US-based employees and service providers a stake in IOG's success. Designed with tax efficiency and long-term growth in mind, the plan underscores equity as a vital component of employee compensation, fostering a sense of collective ownership and performance incentivization.

Dan Coleman and Megan Jagish offered an in-depth presentation covering key terms like vesting, the significance of an 83b election, and how profits interests operate differently from traditional equity plans. Attendees were encouraged to take advantage of future educational sessions and access additional resources such as the equity calculator to maximize their understanding and benefits from the plan.

The session concluded with a Q&A, addressing logistical concerns and reinforcing the plan's participant-friendly features, such as its alignment with foundational IOG values and participant retention strategies. With further educational opportunities on the horizon, the EEF0 plan is positioned as a robust and inclusive approach to employee engagement and growth.

Chapters

• 00:00 - 00:30: Introduction and Kickoff The chapter begins with an introduction and kickoff of an EEF0ero profits interest plan. The speaker acknowledges the participants, some of whom are joining late, and mentions that the session is being recorded. The focus of this chapter is to guide the attendees through understanding the EEF0ero profits interest plan, commonly referred to by this acronym.
• 00:30 - 01:00: Eligibility Criteria The chapter titled 'Eligibility Criteria' outlines the conditions for participating in the equity plan session. This session is specifically for US-based employees and service providers who were hired before December 31st, 2023. Those who did not meet these criteria are advised to wait for their specific session. The equity plans are tailored with consideration for location and tax efficiency.
• 01:00 - 01:30: Quick Introductions The chapter titled 'Quick Introductions' begins with an emphasis on understanding one's own plan before delving into others. It mentions that information regarding educational sessions about these plans will be communicated via email. Megan Jagish, head of total rewards at IoG, introduces herself and Dan Coleman from Infinite Equity, highlighting their roles. Dan has been instrumental in developing the equity plan and remains a valuable resource for participants. The session underscores the significance of staying informed about plan-related education.
• 01:30 - 02:00: Tax Disclaimer The chapter titled 'Tax Disclaimer' features a presentation setting led by a senior global compensation analyst named Oldfield. The session is structured to include feedback collection, with Dan and another host facilitating the flow of the meeting. Participants are requested to hold their questions until the end, where there will be a Q&A session. Alternatively, questions can be submitted via the chat function. The speakers assure that any unanswered questions during the call will be addressed afterward asynchronously. Participants are also reminded to mute themselves to prevent unwanted noises from being recorded.
• 02:00 - 02:30: Understanding the Equity Plan The chapter 'Understanding the Equity Plan' begins with a disclaimer emphasizing the importance of consulting with legal and tax professionals. It is stated upfront that the materials presented are supported by disclaimers and attendees are advised to seek personal legal advice. The structure suggests upcoming slides and discussions, but the provided content emphasizes the disclaimers primarily.
• 02:30 - 03:00: Foundation of the Equity Plan The chapter titled 'Foundation of the Equity Plan' aims to demystify the concept of equity for the readers. It explores the intrinsic value of equity and its implications for individuals during their tenure at IOG. Furthermore, the segment addresses the complexities of how equity is taxed in the US. The goal is to equip everyone with a comprehensive understanding of their equity plans, ensuring they feel informed and confident rather than overwhelmed by excessive information.
• 03:00 - 04:00: Eligibility and Awards In the 'Eligibility and Awards' chapter, the foundation of the equity plan is discussed with three core principles highlighted. The first principle emphasizes collective ownership, illustrating how offering equity reinforces a collaborative culture at IOGG. It promotes working together and sharing in the company's success, epitomized by the phrase 'teamwork makes the dream work.' The second principle focuses on rewarding performance. It underscores the importance of sharing the value created by individuals and the organization, thereby encouraging better performance and contribution to IoG's success.
• 04:00 - 05:00: Equity Terms Explained The chapter 'Equity Terms Explained' discusses fundamental principles related to equity in a company setting, particularly at IOG (presumably a company or organization). It emphasizes the importance of company performance, suggesting that as the company performs better, the individuals potentially do better as well. The second key point is about creating alignment, meaning that individual incentives are closely tied to the broader goals and successes of the company. This connection is not seen merely as a benefit but is integral to how the organization perceives its relationship with its people and its future. The chapter encourages viewing equity grants as part of a total rewards package, providing a more comprehensive understanding of one’s compensation beyond just salary.
• 05:00 - 06:00: Profits Interest Overview This chapter discusses the concept of 'Profits Interest' as an incentive for employees and service providers. It is designed to encourage retention and reward individuals for contributing to the company's growth over the long term. To be eligible for the initial round of EF0 profits interests, individuals must be employed or providing services for IOG, based in the US, and hired before December 31st, 2023.
• 06:00 - 06:30: Growth and Dividends In this chapter titled 'Growth and Dividends', the discussion focuses on the implementation of a profits interest award from the EF-Zero fund as part of IOG's long-term incentive strategy. Megan introduces the concept and importance of the plan, and passes the conversation to Dan, who is set to explain key equity terms that are relevant to this initiative. The chapter sets the stage for understanding the strategic growth and benefits associated with equity distributions within the organization.
• 06:30 - 07:30: Lifecycle of the Fund The speaker, a CPA with nearly 30 years of experience, addresses the potentially overwhelming nature of financial terms and aims to clarify them. The discussion focuses on equity, explaining that it represents ownership in a business. By acquiring equity in the EF (presumably a fund), investors indirectly own a portion of the companies held by the EF, known as dropdown companies.
• 07:30 - 08:00: Tax Efficiency The chapter 'Tax Efficiency' begins by discussing the concept of sharing value within an organization, emphasizing the importance of participating in the value you help create. The chapter introduces key terms such as the 'grant date,' which is when an award is given, and 'vest,' which refers to the process an individual must complete to fully own the award. Once vested, the award becomes the individual's property and is free from the risk of forfeiture. It also touches on the 'vesting period,' which is the time required to complete the vesting process.
• 08:00 - 10:00: Vesting and Liquidation The chapter titled 'Vesting and Liquidation' discusses the concept of vesting with a focus on input-output arrangements. It explains that vesting is the period during which an award is earned or vested. The chapter highlights that the type of equity involved is called a profits interest, which has been structured to optimize tax efficiency. This form of equity allows recipients to benefit from company profits, emphasizing the financial advantages and strategic planning involved in equity compensation plans.
• 10:00 - 11:30: Taxation Details The chapter 'Taxation Details' discusses strategies for maximizing tax efficiency. It emphasizes converting ordinary income into long-term capital gains. The chapter also touches on key equity terms and delves into how individuals can share in the value they create, implying a focus on equity incentives and taxation related to equity.
• 11:30 - 12:30: Equity Calculator and Next Steps This chapter delves into Equity Funds (EFs), which are specialized investment vehicles often established in the Cayman Islands. These hold shares of companies nominated by IOG. The chapter explains the concept of 'profits interest', which represents an individual's stake in the potential profits and growth of the EF. The value of one's stake increases with the success of the companies within the EF, thus offering a share in the potential success of the fund. The chapter sets the stage for discussing the benefits of holding such shares.
• 12:30 - 14:00: Q&A Session The chapter titled 'Q&A Session' highlights the potential benefits of profit interests, emphasizing tax efficiency since increases in value may be regarded as capital gains. It underscores transparency through an online portal for tracking holdings and notes that vested profits interests do not expire and require no upfront cost to acquire.

Equity Education: EEF0 US Participants (Profits Interests) Transcription

• 00:00 - 00:30 No worries if you couldn't join us. Okay, we're recording now. Awesome. Looks like we've got some folks trickling in, but I'm going to go ahead and kick off. Um, thanks everyone for joining us today to walk through your EEF0ero profits interest plan, which you've probably heard referred to as our
• 00:30 - 01:00 equity plan. Just a reminder, the session today is for employees and service providers who received an email invitation because they were hired prior to December 31st, 2023 and you are US-based. If you did not receive an invitation and you were not hired prior to December 31st, 2023 and you're not a US participant, then please wait for your invite to the equity session that corresponds to you specifically. Each plan has been designed with location and tax efficiency at the forefront. So,
• 01:00 - 01:30 please make sure you learn your your plan first. You can always go back and learn the other plans uh later. Uh the invites for the plan education sessions just like this one will come via email. So, please keep an eye out for those. I'd like to make some quick introductions. Next slide. My name is Megan Jagish, head of total rewards for IoG. I have Dan Coleman with me today from Infinite Equity, who has been a key partner in building our equity plan, and we'll continue to be a resource for the plan and participants. We also have Lisa
• 01:30 - 02:00 Oldfield, our senior global compensation analyst, who will be collecting feedback during this call and keeping Dan and I on track. I'm going to ask that we hold questions until the end of the presentation. We'll keep some of the time at the end for Q&A or please feel free to leave your comments in the chat for us to catch. If we run out of time, we'll make sure to answer those questions async and get those back out to you. I will ask that everybody try to put themselves on mute only because I'm sure you don't want to be caught on the recording making odd sounds. So there's
• 02:00 - 02:30 your there's your first option. Um, next slide, please. So, quick tax disclaimer. We're not attorneys. We're not tax professionals. Please make sure you seek your own legal advice as needed for this plan. Um, you're going to see a lot of these disclaimers popping up in all of our materials. Um, it is critical that if you have uh individual questions that you're touching base with with your own legal and tax advisors. Next slide. So, what we really
• 02:30 - 03:00 want to do today is to help you make sense of this whole thing. What do these equity actually mean for you? How does this potential value work? what does it look like for your time at IOG and plus a dive into how this equity stuff is taxed in the US. Think of this as your one-stop shop to understanding your equity plan. We want to make sure everyone walks away feeling confident and informed and not totally overwhelmed by information overload. Although there is a lot of information, you will get this multiple times. Uh we want you to have a good solid grasp of this equity
• 03:00 - 03:30 stake you have and what are the possibilities and answer any questions you might have been pondering. So next slide. So what is the foundation of our equity plan? We see three core principles here. The building blocks of the program. The first one is collective ownership offered by offering equity. IOGG is reinforcing that collaborative culture. It's about working together, sharing in the success. Teamwork makes the dream work. The second is reward performance. It's all about sharing the value that you create. So the better IoG and its
• 03:30 - 04:00 drop-own companies perform, the better you potentially do. And the third principle is to create alignment. This means that your incentives are directly tied to the big picture, IOGG's goals and success. Your success is IoG's success and vice versa. It's not just a random perk. It's actually baked into how IoG thinks about its people and the future. So, thinking about your equity grant as part of your total rewards package allows you to see how it fits into your whole compensation picture at IOG. It's not just your salary. It's not
• 04:00 - 04:30 just your benefits. It's a strategic piece of the puzzle designed to incentivize and retain great talent like yourself. So offering you a stake in the EF growth over the long haul. We want you to be here long term and we're going to reward you for that. So next slide. So who can actually get in on this initial round of EF0 profits interests? As I mentioned at the top of the call, to be eligible, you must be an employee or a service provider of IOG. you are based in the US and you were hired by December 31st, 2023. So, if you meet all
• 04:30 - 05:00 of these criteria, you can expect to receive a award of profits interest from the EF-Zero fund. This means you are part of the initial phase of IOG's long-term incentive strategy. Now that we've discussed some of the reasons for the plan and why it's important, Dan's going to walk us through some key equity terms that we'll be referring to today. Uh, all right. Thanks, Megan. Um, sure. So, uh, I've been in the equity space
• 05:00 - 05:30 for going on 30 years now. I'm a CPA, so you know, uh, I understand that some of these terms may be a little overwhelming, and we're going to get in try to demystify it a little bit for you. So, equity is, you know, an ownership in stake in a business. uh by by receiving equity in the EF, you will own indirectly a portion of the companies that are held by the the EF that the drop down companies and that
• 05:30 - 06:00 will allow you to share in the value that you're helping to create. Um the grant date is simply the date on which the award is granted to you. vest is the pro the process that you have to go through to earn the award. Um once an award is vested, it's your property and you know it's no longer subject to any risk of forfeite. The vesting period is the period of time over which you have
• 06:00 - 06:30 to work for uh input output in order to you know vest in the award or to earn the award. It's the period over which the award is earned. Um the type of equity that you will be receiving is known as a profits interest. Um Megan had touched on you know this plan has been designed to optimize tax efficiency. Profits interest are a form of equity that will uh that you know will allow you to you
• 06:30 - 07:00 know benefit in the most taxefficient means possible. It it effectively converts ordinary income into long-term capital gain. Great. Thank you, Dan. We can stay on this slide, too, Lisa. This is this is the slide. So, now that we've covered the basics, we've laid out some key equity terms. There will be more. Um, there are always more terms when it comes to equity. Um, let's dig into how you actually share in the value you help create. So, let's remember that these
• 07:00 - 07:30 EFs are kind of like specialized investment vehicles. They're set up as companies in the Cayman Islands. They hold shares of those IOG nominated drop-own companies. Your profits interest, that's your stake in the potential future of profits and growth for that entire EF. The better those drop-own companies do, the better the EF does. And that means your stake becomes more valuable. So your profits interest give you a piece of the potential success of this fund and the companies inside it. So let's look at why what like what are the benefits of having
• 07:30 - 08:00 profits interests on our next slide. So one major one is the potential for tax efficiency. Any increase in value might be treated as capital gains for tax purposes which can be a good thing. Uh plus a transparency piece. You will have access to a dedicated online portal where you can see how everything is doing. Track your holdings. Another biggie is once your profits interests are fully vested, they do not expire. And a huge plus, there's no upfront cost to actually buy them. Once they are
• 08:00 - 08:30 vested, you keep ownership even if you decide to leave IoG at any point down the line. So let's take a peek at what's actually in EF0. Go to our next slide. So we have Hoskinson Biotech, Midnight, Ghostfire, and Se for the EF-Zero lineup. Keep an eye out. We're going to have a fireside chat. We're going to invite you all to to learn more about these companies. But now that we know more about the composition of EF0, let's look at the life cycle of the fund
• 08:30 - 09:00 itself. So there are three phases of the life cycle of the fund. Creation is when the EF is officially formed as a Cayman Islands company and gets the initial stock of the chosen drop down companies. That's what it's occurring right now. We're moving all those assets into the big bucket so we can share the awards with the folks in the in the organization. Then comes the growth period. This is where the magic can happen. the EF's value might go up as the drop-own companies grow. And if those companies pay dividends, those
• 09:00 - 09:30 could flow into the EF and maybe even get allocated to you. And finally, a liquidation, which we mentioned, uh assets are sold and everyone gets their share of the proceeds. So, very simply, create the fund, let it grow, and then eventually sell the assets and distribute the money. I'm going to hand it back over to Dan. He's going to walk us through some additional terms and definitions and then also some mechanics and examples of how the fund will work. All right. Thanks, Megan. Uh Lisa, can you put Yeah. all 11 boxes at once?
• 09:30 - 10:00 They just keep going. Yeah. All right. So, you know, uh as Megan said, this was uh one of the objectives for this plan was tax efficiency, and it is as tax efficient as you can get. The downside or the flip side of that is profits interest can be a little nuanced. Um it's not as simple as a share of stock or an option. So you know as we go through the deck today the presentation um there are some terms
• 10:00 - 10:30 that it will be helpful to understand. you know, um, starting as, uh, Megan said, uh, the EF, it is a special entity, uh, created in the Cayman Islands specifically to, you know, allow the participants to help share in the value they create. You can, it's sort of analogous to a mutual fund. It holds stock of other companies to the extent the value of that stock appreciates, you share in that growth. um you're effectively, you know, an
• 10:30 - 11:00 indirect owner of each of the four drop- down companies. As an owner of the EF, you will be allocated a portion of the earnings of the EF. So to the extent that you uh you know that the drop- down companies pay dividends, that's earnings to the fund which is earnings to you. So, you will be allocated a portion of any dividends that are paid. But let's take a step back for a
• 11:00 - 11:30 minute and draw a distinction between allocations and distributions. Allocations are what you pay tax on. It's your share of the earnings. Distribution is cash that comes out of the fund and is paid to you. So, you're taxed on the allocations, which is your share of the earnings. At the start of the fund, you're at you will actually be receiving catchup allocations which are a preferential form of the allocation. You know, 100%
• 11:30 - 12:00 of the earnings of the fund will be allocated to the profits interest until your capital account balance reaches uh your threshold value. The capital account balance you can kind of think of as a savings account. It's increased by uh allocations. It's decreased by distributions or money that you take back out of it. There will be a couple of different types of distributions.
• 12:00 - 12:30 There's a tax distribution. So, you know, as we said, if there's any uh earnings for the fund, those fund those earnings will be allocated to you based on your uh proportionate ownership of the EF. that will be taxable to you. The fund will pay you or distribute to you money to pay that tax liability. That's a tax distribution. Eventually, once your capital account reaches the threshold
• 12:30 - 13:00 value, any dividends that are paid to the fund will be distributed to you entirely, and those are discretionary distributions. uh as Megan said, you know, at the end of the fund's life cycle, all of the uh equity of the drop down companies will be sold and the fund will be liquidated and you'll receive your proportionate share. That's a liquidation. um the threshold value that I mentioned that your capital account has to
• 13:00 - 13:30 reach that is on the uh equal to the grant date value of the stock in the EF multiplied by your proportionate share of the EF. So if the uh at inception the EF was worth $3 million and you received a profits interest on 2% 2% of $3 million is $60,000. That will be your threshold value. Um
• 13:30 - 14:00 generally equity based compensation is taxed at vest. However, the IRS has a process whereby you can elect to be taxed on the value of the equity on the date of grant. profits interests statutoily on the date of grant have a fair market value of zero. So if you file what's known as an 83b election and elect to be taxed on the value of the profit's interest on the date of grant, you will be taxed on a value of zero and then any gain
• 14:00 - 14:30 realized down the road when the uh fund liquidates will be taxed as capital gain, you know, potentially long-term capital gain. And then the final thing is, you know, a member. With publicly traded companies, you have shareholders. The for an LLC, you're not a shareholder, you're a member. So, these are some terms that we're going to be using in the examples. We just wanted to lay a quick ground uh some groundwork to to help understand the examples as we go through
• 14:30 - 15:00 them. All right. Next slide. All right. So uh we had talked about vesting the process that you know uh by which the the property becomes yours. Once vested it can no longer it's no longer subject to a risk of forfeite. If you leave you know you still own it. This program has been uh designed in a very advantageous and you know compared to market generous for uh way
• 15:00 - 15:30 when it comes to vesting. Typically vesting starts on the date of grant. So you know uh it would be in three equal installments. If it was granted today a third would vest on April 10th of 2026, 2027 and 2028. Um your awards the vest start date is your date of hire. So, if you were hired prior to April 10th of 2022, your award will be 100% vested on the date of
• 15:30 - 16:00 grant and will never be subject to a risk of forfeiture. Um, if you know, everybody on the call was hired uh prior to December 31st of uh 2025. So, you know, you will have some prior service credit. You know, so if you were hired two years ago, you know, it will twothirds would be vested on the data branch and the last trunch would uh Oh, sorry. Sorry. Sorry, Glenda. Yes. Uh I I misspoke. It's December 31st, 2023, not 2025. I I apologize to the
• 16:00 - 16:30 air. So again, if everybody will have some prior service credit um and everything should be vested by the end of 2026 at the absolute latest for all participants. Uh, next slide. All right. So, the growth period and dividends and you know, Megan had touched on this when she uh did the overview of the life cycle. So, we have the date of grant, we have the growth period and the dividends, which is the
• 16:30 - 17:00 period between the date of grant and the liquidation. And that's the period during which the drop down companies are appreciating in value. You know, you're working hard. The value of those companies is increasing. the value of the stock of those companies increases. So the value of the EF increases and the value of your ownership of that EF is going to increase. So you know uh the objective is you know over the period of time between the date of grant and the uh the liquidation date that as those
• 17:00 - 17:30 values uh as the values of those companies increase that you will share in that growth. Also to the extent that uh any of the drop- down companies pay a dividend that you know as as we um just touched on on the prior page those dividends will be allocated to you and you know uh you will benefit from the cash flow that those uh drop down companies are generating. Right. Next
• 17:30 - 18:00 slide. All right. Uh bit of a night chart. So all right. So all right. All right. So I'm sorry. Uh all right. So as as I said the um the EF will receive or may receive
• 18:00 - 18:30 dividends from the drop down companies. those dividends will be allocated to your capital account. As I said, a capital account, it's a not notional account. You can kind of think think of it as a savings account. So, if the company paid a dividend, you would get your proportionate uh amount. The entire amount would be credited to your capital account and you know the entire amount will be taxable to you and you will
• 18:30 - 19:00 receive from the EF a cash a tax distribution that is intended to cover your tax liability. It is intended to be cash flow neutral to you. Um you will not be uh you know subject to an unfunded tax obligation because of your ownership of the profit's interest. Once your capital account reaches the threshold value, so once the you know the amount of the dividends less the amount of the distributions reaches the
• 19:00 - 19:30 threshold value, 100% of any additional dividends will be distributed to you. And as I said earlier, you're not taxed on distributions, you're taxed on allocations. So it's effectively any cash that you receive is after tax cash. Next slide. All right. So, here's a real quick example. We're going to go into more detail uh examples in a couple of slides, but this just wanted to
• 19:30 - 20:00 highlight what's the impact of being above or below the or having a uh your capital account being above or below the threshold value at the time of a liquidation. So on the left we have an individual who, you know, received a 2% interest in an EF that on the the date the profit interest was granted was worth $3 million. So 2% of $3 million is
• 20:00 - 20:30 $60,000. That's this participant's threshold value. In this example, we assume that the capital account balance only reached $48,000 prior to the uh liquidation event. So, the difference between the threshold value and the capital account balance that that $12,000 shortfall is deducted from the proceeds that this individual would have otherwise received. So if the fund is
• 20:30 - 21:00 liquidated uh when the value of the the drop down company stock that it holds is worth $10 million well 2% of that wouldn't you know initially be allocated to this participant. So 2% of $10 million is $200,000. However they this individual had a $12,000 shortfall on their threshold value. So the, you know, that $12,000 is deducted from the $200,000 they would
• 21:00 - 21:30 have otherwise received and they will receive a payment of $188,000. The flip side of that is, you know, say that the capital account balance had reached the threshold value. So that's what we have on the right side. So this individual uh had a s, you know, had reached parody. the capital account balance uh equal the threshold value. So in this case, if the um fund was liquidated at
• 21:30 - 22:00 $10 million, the individual would keep the two the full 200 or would be receiving the full $200,000. All right, next slide. All right, so let's walk through a little more detail. So this is an example of where the participant does not have a capital account balance that reaches uh par with the threshold value. So this is Mary. Uh Mary's award agreement stipulates that she received
• 22:00 - 22:30 2% of the 2% profits interest on the EF. Profit the EF was worth 3 million on the date of grant. So Mary's threshold value is $60,000. In year one, the EF receives dividends from the drop- down company stock in the amount of $1 million. So 2% of that is allocable to Marion. So 2% of a million is 20,000. So that amount is
• 22:30 - 23:00 uh added to her capital account balance. However, Mary's going to be subject to taxation on that $20,000. So, uh, Mary will receive a tax distribution of $4,000, you know, ba based on an assumed 20% aggregate tax rate on dividends. So, the net impact is at the end of year one, Mary has a capital account balance of $16,000, the
• 23:00 - 23:30 20,000 that was allocated less the $4,000 tax distribution that she received. In year two, the EF received dividend income of 500,000. Similar process again, Mary is uh entitled to 2% of that. That's allocated to her capital account balance. So, you know, the capital account balance goes from 16 to 26, but then she receives a $2,000 tax distribution to cover the tax on the 10,000. So at the end of the year, you
• 23:30 - 24:00 know, the capital account balance has gone up by 8,000 from 16,000 to 24,000. In year three, again, the the drop down companies distribute a half a million dollar aggregate dividend payment. Mary again gets 2,000, excuse me, 2% of that. So, you know, another net increase in her capital account balance of 30 of $8,000, which takes her from 24,000 to 32. In year four, the drop down companies go back to a million
• 24:00 - 24:30 dollar aggregate dividend. Mary's 2% of that is 20,000. She receives a $4,000 tax distribution. So, you know, she ends year four with $48,000 in her capital account. the 32,000 from the end of year three plus the additional uh 16,000 from year four. In year five, the fund is liquidated at $10 million. So um if Mary's capital account balance had
• 24:30 - 25:00 um reached parody, you know, if it had reached $60,000 that the um the threshold value, Mary would have received 2% of the $10 million liquidation proceeds. But the shortfall in her capital account balance that 12,000 is deducted. Um so you know Mary's net payment is 188,000 and her you know her after tax
• 25:00 - 25:30 gain excuse me her pre-tax gain is 140,000. So it's the 88,000 less the value of her capital account of uh 48,000. So, she will be paying long-term capital gains tax on 140,000. Next slide. All right. So, this is John. This is a similar fact pattern except that
• 25:30 - 26:00 the uh drop down companies pay sufficient dividends that uh John gets uh John's capital account balance reaches the threshold value. So again, you know, uh John's award agreement stipulates that he has a 2% profits interest on the EF. As of the date of grant, the EF had an aggregate value of $3 million. That is just the drop- down company stock that's held by the EF was worth $3 million at the time
• 26:00 - 26:30 John received his profits interest. In year one, the EEF distributes, excuse me, the E EF receives a million dollar in aggregate dividends from the drop- down companies. John has a $20,000 allocation less the $4,000 tax distribution. Ends the year with a capital account balance of 16,000. In year two, the drop down companies distribute um $2 million of dividends. So, you
• 26:30 - 27:00 know, 2% of that John, you know, is entitled to an allocation of $40,000. So, his capital account increases by that amount. But John also has to pay tax on that 40,000. So, the EF distributes $8,000 to satisfy the tax liability. So he ends the year with 48,000, an incremental 32, just the difference between the 40 and the 8 and the 16. He ended the year 1 with
• 27:00 - 27:30 um in year three dividends income drops to 500,000. So you know the net increase to the capital account balance is 8,000. And so it goes from 48,000 at the end of year 2 to 56,000 at the end of year three. And then in year four, the fund has received enough dividends that John's capital account balance reaches uh parody with the
• 27:30 - 28:00 threshold value. So, the fund receives 500 uh 500,000 of dividend uh income from the drop down companies that gets allocated out to the participants. You know, John's share is $10,000. However, John only needs $4,000 to reach parody for his capital account to reach par with the threshold value. So the first
• 28:00 - 28:30 $5,000 of the amount that's allocated to John goes to satisfy the you know the capital account get it to parody. So $5,000 is allocated to John. Capital account balance goes from 56 to 61. He gets a $1,000 tax distribution. Capital account balance is now at 60 which is his threshold value. So all additional dividends, you know, from in year four and in the future, 100% would
• 28:30 - 29:00 be allocable to John. So or excuse me, distributable to John. So, you know, uh, of that $10,000 dividend in year 4, 4,000 goes to John's capital account, $1,000 is a tax distribution, 5,000 is a discretionary distribution, and then, you know, all future dividends will be discretionary uh dividends and be 100% distributed to
• 29:00 - 29:30 John. There's no more allocations to the capital account. All right. When the fund is liquidated, so we assume it's liquidated at a $10 million value. John is entitled to his 20%. So 200,000. John's capital account is it uh equals his threshold value, so there's no deductions. He gets the full $200,000 cash payment. $140,000 is long-term capital gain. 60,000 is just a
• 29:30 - 30:00 return of capital because you know those are allocations he's already paid tax on. Um all right, next slide. All right, this is just a real simple example of what happens if no dividends uh are distributed during the the time the fund is in existence. you know, we just assume that all of the drop- down companies are reinvesting all of the cash they generate to fund future
• 30:00 - 30:30 growth. So, in this scenario, no dividends in years 1 through uh five, capital account balance stays at zero. So, if the fund, you know, started at 3 million, the individual had a 2% ownership uh stake or 2% profits interest stake in the fund. the hurdle value is 60,000. In 20, you know, in 2030 when the fund is liquidated for 10 million, they'd start with a, you know, an
• 30:30 - 31:00 allocate or an allocation of the uh liquidity proceeds of 200,000. However, now the difference between the threshold value and the capital account balance is the full 60,000. So in this case, the participant would only receive 140,000. again, all of which would be taxed as long-term capital gain. All right. Uh, next slide.
• 31:00 - 31:30 Wonderful. Thanks, Dan. I think the important thing to remember is that the threshold value does not go away if you don't if dividends do not get generated. So the threshold value is always going to be there in the background and you're going to have to bring that threshold value to par or else it comes to par at the liquidation event. But what happens if you leave? I know this is on top of everybody's mind. Um the great thing is is that you get to
• 31:30 - 32:00 keep vested, you get to lose unvested. Um the rule is essentially that if you have profits interests that haven't vested yet, then you lose them. So again, if you go back to the vesting schedule of a third, a third, a third over three years, you can vest up to a third each year and those are yours. You do not have to forfeit those. Um, but if you have and if you have profits that are already vested, by the time you leave, you get to keep those. Um, there is a catch. Um, the EF typically has a
• 32:00 - 32:30 right to buy back those vested profits interest from you. And if they do, they usually pay you the original price you paid or the current market value. So just it's really what happens to your county group. Alexi, we'll catch that on the end because I don't want to scoop back, but we're going to catch all your questions in the comments so we get them in the Q&A. Um, next slide, Lisa. Dan's gonna jump back into taxation. Yeah, profits, interest, taxation. you know, I touched on it on the uh the prior examples when we were going
• 32:30 - 33:00 through, you know, capital account balance and thresholds. Um, but let's take a little bit deeper dive do it um on this. So, the general rule for equity based compensation, you're taxed on the val the fair market value on the date of vest. However, you can elect to be taxed on the value on the date of grant. Profits interest are a unique instrument in which statutoily they are defined as having
• 33:00 - 33:30 zero fair market value on the date of brand. So if you elect to be taxed on the value on the date of grant by filing what's known as an 83B election, you know, you will be taxed based on a value of zero. And you can only be taxed on these once. So if you're taxed at zero on the date of grant, any gain realized down the road when the fund is liquidated is long-term capital gain. So by filing the 83b
• 33:30 - 34:00 election, there's no tax at grant. There's no tax at vest because you already paid your tax, but you paid zero. And when you file the 83b election, that's when your holding period starts for long-term capital gain. So, you know, as long as, you know, you hold it for at least a year and there's no expectation the fund will be liquidated within a year, any gain that you realize will be taxed as long-term capital gain. All right, next
• 34:00 - 34:30 slide. Okay, so how are the dividends taxed? Because the last slide was you know how the profits interest itself is taxed but to the extent the fund receives dividend income that are distributed by the drop- down companies you're going to be taxed on that you will be taxed on any allocation of earnings that are credited to your capital account. Um the dividend tax rate is
• 34:30 - 35:00 going to be specific to your individual uh tax situation, but typically uh the federal rate for US taxpayers is either going to be 15% or 20% depending upon your income level. If a dividend is credited to your capital account, you will have to pay tax on it. But the fund will distribute a tax distribution in an amount intended
• 35:00 - 35:30 to cover your tax liability. So it is intended that these will you know until your capital account balance reaches parody with the threshold value any taxes will be cash flow neutral to you. You will not have to come out of your pocket to pay taxes on these incentives. And once the capital account balance reaches parody with the threshold value, all dividends will be distributed to you. And again, they'll be subject to
• 35:30 - 36:00 the 20% tax. Um, but 100% of the dividend once your capital account reaches parody will be distributed to you. Um, next slide. All right. So here we have an example of the taxation. So again uh comparable to the prior examples, the EF was worth $3 million at the time the profits interest was granted. The participants award agreement stipulated
• 36:00 - 36:30 that they had a profits interest on 2% of the fund. So the threshold value uh for for this participant equals $60,000. In year one, they received or uh there was a million dollars worth of dividend income to the fund. 20,000 or 2% of that is taxable to the participant. They get a $4,000 uh tax distribution to cover the
• 36:30 - 37:00 liability. So, you know, their after tax cash flow is zero in year one, but they've added $16,000 to their capital account. Same thing in year two. Million dollar of dividend income, 20,000 uh taxable amount, $4,000 tax distribution. So again, it's neutral to the participant. Same thing in year three. So we've got a capital account balance of 48,000. again u a million dollar of
• 37:00 - 37:30 dividend income in year four but the participant only needs a pre-tax amount of 15,000 or 12,000 after tax to reach parody uh with their capital account to the threshold value. So you know the first 15,000 12,000 after tax is allocated to the capital account. So there's 15,000 of income, 3,000 of tax, $3,000 of tax distribution, neutral after tax cash
• 37:30 - 38:00 flow, but there's 5,000 left of that 20,000 that was allocated. And because we've already reached parody, the full 5,000 is distributed to the participant. 20% of that or 1,000 is taxable. So their net after tax cash flow is 4,000. And you know, this would continue every year that there's distributions until the fund is liquidated. So, if we assume the fund is liquidated in year five at a $10 million
• 38:00 - 38:30 value, the participants entitled uh 2% of that or 2 million or excuse me, 200,000. only 140 of that is taxable to the participant because their capital account balance uh you know that 60,000 is a tax-free return of capital because they've already paid tax on it when it was allocated to their capital account. So they've got 140,000 of long-term capital gain at a 20% rate is 28,000 of long-term uh capital gains tax. They
• 38:30 - 39:00 receive a payment of 200,000. They receive the whole amount, but 28 has to go to the taxing agencies. So their net after tax cash flow at liquidation is 172,000 and over the life cycle of the fund their net after tax cash flow is 176,000. All right, next page. All right, taxes can be very complicated. Um, you're going to receive
• 39:00 - 39:30 what's known as a K1 for any uh earnings that are allocated to you. highly recommend that you seek a tax professional. Everybody's circumstances are different. I'm a CPA and I don't even do my own taxes. So, please, if you have any questions, talk to your tax advisor. All right. Perfect. Thank you, Dan. Appreciate that. Um, this slide is a little lacking today, but I want to assure you all that
• 39:30 - 40:00 we what we've been building in the background that's being tested in the background getting ready for launch is our equity calculator. Um, we will have an equity calculator for each plan. So, this equity calculator will be for EF0 profits interest plan. Um, it's uh ultimately what we want is to showcase this closer to launch once we've gone through the testing. It's a resource we've developed because we want participants to be able to plug in different assumptions on how those drop down companies might grow and how the EF
• 40:00 - 40:30 might perform. You can basically run different scenarios, see what might happen to your equity stake in different situations. And we hope it'll be helpful in planning and to provide potential outcomes for you. Uh the tool will be available online and it'll be available from our equity hub that includes other useful documents such as the guides, the equity glossery, FAQs, and of course this presentation and recording. Got a couple other things I want to cover up on our next slide as far as next steps. More slides. So some of the other
• 40:30 - 41:00 next steps include office hours availability with Dan, myself, and the team. We'll be providing you um some open availability that you can go ahead and schedule um some sessions with us if you have some direct questions you'd like to ask. Um we will have a follow-up session. Dan talked a lot about the 83B process. We're going to spend a lot more time on that and do a full session on 83B. Um we're also going to do a full run through and kind of a demo of the equity calculator. So keep your eyes out
• 41:00 - 41:30 for for more invitations on more things. Um there's a lot more education coming. Um I know as Dan mentioned in the beginning, we're in this every day. We know the terminology. It's a lot to take in on your first um equity education round, especially if you have maybe had a history with um an options plan or an RSU plan. I'm sure you're realizing this is this is a little bit different than that. It operates a little bit differently. However, at the core of the plan, this is an equity plan and we are
• 41:30 - 42:00 sharing in the success of the company. So, the the foundation is the same of of most equity plans. The operation is a little bit different. Um, so be patient. Know that more education is coming. Know that there's um availability for you guys to reach out to us and spend time individually asking questions. Um, we are still also shooting for awards to be granted um by April 30th. We're keeping you posted on that progress. We've got a couple assets that are currently moving and that's the only thing we're waiting on. Um, in the meantime, again, keep an
• 42:00 - 42:30 eye out for the fireside chat invitations, the equity hub blog posts, the equity portal will be brimming with information for you. Um, after this call, you will see kind of a packet going out with uh the first kind of round of information. Um, we covered a lot today. I realize we try not to do information overload, but it's it's hard to do to just give everybody kind of a base understanding. Um, we covered the basics today. Uh, we covered the specifics of profits interest. Um, we
• 42:30 - 43:00 hope you now know how you can earn value through the things like appreciation and dividends. Um, the key concepts of vesting and threshold value and all the US tax implications. Um, of course, our goal has been to try to simplify this as much as possible and give you a clear picture of what the potential equity stake you have at IOG can do for you. And I hope we've accomplished that. Um, of course, we are open to feedback and if there are things that you would like to share with us of just what might be
• 43:00 - 43:30 helpful for you, um, please do feel free to reach out. Um, I'm going to open up the floor. We've got about 15 minutes for Q&A and they are flying in. So Lisa, do you maybe want to read off I guess maybe in an order? Sure. So Alexi was asking what happens when your account goes above the threshold. Um it the capital account balance will never go above the threshold. Once you your capital account reaches par with the
• 43:30 - 44:00 threshold value, 100% of the dividends will be distributed to you. So you know if you're at threshold, you get a $10,000 allocation. So, it would go up 10,000, but then you're going to get a $10,000 dollar distribution. So, all the cash goes out to you and your account balance stays at threshold. Great. Thank you. Then John was asking, will that cash payment to the participant to settle the taxes, will
• 44:00 - 44:30 that be automatically withheld by IOG for taxes via payroll? Typically, no. uh you know cuz you'll be receiving a K1 um so it will be coming from the EF unless you get it integrated um you know depending upon whether or not the EF uh gets its income periodically you know uh you know there may have to be estimated tax payments but essentially every time there's a
• 44:30 - 45:00 dividend the the fund will be distributing a tax payment to you. Okay. Then Corey's asking, "Will I OG employees that will eventually transition to HFO be eligible for this plan after the transfer?" Yeah, I can take this one. So, um, technically, EF0 profits interest plan is is shut. So, if you weren't hired by December 31st, 2023, then you did not make the cut off
• 45:00 - 45:30 for this plan itself. there is another plan coming for our our other joiners after that point but um so we wouldn't have anybody transferring nobody transferred to HFO prior to 2023 so we shouldn't run into that issue um Corey certainly happy to connect with you um and discuss if you have a a specific situation um but 2023 should be locked down so okay um Fernando is asking how is the
• 45:30 - 46:00 threshold value calculated And what is the threshold value for EF0? Um the threshold value is calculated based on the value of the EF at the time your profits interest is granted. So you know EF0 is just being created. It will be based on the value of all the drop- down company stock that's uh contributed to the EF multiplied by uh your percentage
• 46:00 - 46:30 ownership. So if you know the value of the drop-own company stock contributed to EF0 equal $3 million on the uh at the time the profits interest was granted. That is just illustrative. That is not saying that EF0 is going to have a $3 million value. It's just for illustration purposes. Um and you had a 2% uh ownership stake in your profits interest. 2% of $3 million is $60,000. That would be your threshold value.
• 46:30 - 47:00 Right. Then Christos is asking is the fund configurable in any way either the allocation of the four assets midnight sea fund etc or any configuration about the threshold accounts that we can affect? Not at the moment. Um the way the plan is set today is that you get uh everybody will get kind of an equal allotment of those assets that are sitting in EF0. Um it's certainly
• 47:00 - 47:30 something, you know, this is our first round on the plan. Certainly something we will take into thought as we move forward and build out more EFs. Um but I would say for this one that unfortunately no, there's no um configuration that you can affect or adjust kind of your ownership in those drop- down companies. Okay. Um, what happens if you don't file an 83B? Um, there is a potential that you could,
• 47:30 - 48:00 um, the gain would be taxed as ordinary income rather than long-term capital gain. So, it' be the difference between, you know, if you're in a high tax state between t between state and federal, you know, you could be paying 45 to 50% tax as opposed to, you know, 20%. Okay. Uh, next question is about eligibility. Um, who is eligible to participate in terms of contract type and location? Yes. Uh, want to make sure
• 48:00 - 48:30 this is really clear. So, an employee or a service provider that was hired before December 31st, 2023. And specifically for this plan that we've gone over today, which is profits interest, you need to be US-based. Now that is just the eligibility for this plan that we walked through today. There are other plans that have other eligibility that we'll be rolling out for the rest of the organization. Um it just so happened that US the US plan got finished first
• 48:30 - 49:00 and so we're rolling these in a cadence but that is the uh the eligibility for this plan. Uh tax form 887A 74A sorry um is tax from that form. If so, when do we have to file that by? If the hire date was before December 2023. Uh, what was that form, Lisa? For I when I came up, I thought it was 8879. Uh, this says 8874A.
• 49:00 - 49:30 Okay. I don't believe that would be required. No, I've actually never heard of the 8874A form being tied to this, but No, I Yeah, I I've never seen that in a profits interest. Yeah. Okay. Will project tokens and tokens from midnight
• 49:30 - 50:00 be part of the allocation distribution? Tokens are not currently part of the EF fund lineup. Um, I know it is part of discussion as again we grow more EFs. I know Charles's vision is that we we hopefully continue to roll out more EF portfolios and have people join those. Um but currently Midnight is not a part of that or sorry tokens are not a part of that and i.e. midnight tokens are not a part of that even though midnight is just to be
• 50:00 - 50:30 clear. Will participants in EF0 also participate in future funds and or will the products in future funds also be added to EF0? Good question. So EF0 and the assets within it are locked in. They will not change. Um you might have heard there is EF2425 which is the next fund which will essentially pick up individuals who were hired January 1st, 2024 and going
• 50:30 - 51:00 forward. Um sorry the other part of the question we wouldn't add any more funds to EF0 but the reason that we have pushed out the launch date for EF2425 is because we are looking to add more funds to that group. So the funds need to be locked in um and then we can add then we can add more funds to a new fund lineup going forward. So no more funds going into the EF0 but um the EF242 lineup is still TBD and could have more added to it. Um the other part was
• 51:00 - 51:30 you will if you are in EF0 as a participant you will roll over to EF2425. Your start date your vesting start date on EF2425 will be Jan 1st 2024. So you will roll off of EF0. Well you'll roll you'll continue rolling on EF0 and then you will be added eligible to EF2425 as of Jan 1st 2024. and your your
• 51:30 - 52:00 three-year vesting schedule will start from that point. Okay. Do you have to file an 83B and form 8879? Oh, so form 8879 is just a form that allows you to eile. So, um 8, you know, 83B can be filed with a manual signature. It can be uh filed electronically. If you want to file electronically, yes, you'd have to do the 8879. Yeah, and I will say just a reminder 80
• 52:00 - 52:30 uh 83b election and whether you should elect that or not. We're going to have a a deep dive follow-up session on that so we can get into the nitty-gritty of of the forms, what needs to be submitted. Now, there's some timelines that are required on those 83b forms. So, we want to make sure that we spend enough attention on that and make sure everybody's clear and can make a informed decision on the 83b. So, um keep your eyes open for that invite coming soon. Okay. Um, how are the profits interests
• 52:30 - 53:00 percentages determined? Yeah, good question. And we didn't purposely um go over a lot of that today because it will be um an individual allocation to every person. Um, but we have taken essentially, you know, we've looked at our industry in web 3, um, crypto, blockchain. Uh, we've made competitive benchmarks to the allocations. Um and then depending on what the pool size is, we're applying those percentages um based on role in seniority and scope um
• 53:00 - 53:30 in the organization. So there is a fair and consistent approach to how we are giving awards um and they are benchmarked to be competitive for our industry. Okay. And we have just one more question. Um, nice one to finish on actually is what do we expect to receive next in terms of further details and instructions? Yes, a lot. Um, this is just the first real I know we went pretty deep today on taxation and
• 53:30 - 54:00 mechanics. Um, but we realize it's going to take a couple rounds of some for some folks to feel really comfortable with the design and plan. Um, after this call, we will be sending out of course this recording. Um we will be sending out the actual presentation. Um there is an equity hub that is going up on our internet and that is going to really be where you want to look for um any additional details coming. That is where we will post the equity calculator um
• 54:00 - 54:30 once it has been fully tested and available. We'll put that out there. So keep your eyes out for those. Again, there's also invites coming for um the fireside chats where we actually spend some time looking at the products that are in EF-Zero and giving you guys some more insight to who is Ghostfire and what are they doing? Uh what is C fund and what are they doing? So, we'll spend some time on that too. So, hopefully all the information will be helpful. Again, also don't want to forget there will be office hours available. So, at the end
• 54:30 - 55:00 of this presentation, there is an inbox, an email inbox that you can email. Um, we'll be sending after this call how you can sign up for time if you just want to spend some time picking our brains or asking us specific questions about it. Great. And then actually we just had one more question in. I think we've got a few minutes left. So what triggers the liquidation event? Good question. That will be a decision that is made by our by our VAB boards.
• 55:00 - 55:30 So the venture accelerator boards or the boards that are sitting over those nominated companies will make decisions to to to liquidate. Right. And that's it on the question front. I think Glenda actually might have had her hand up at one point. Glenda, did you have a question? Um, no. It was more just but you already covered it, Megan. It was just when you had said uh 2425 is there to pick up 24 starters. I just wanted to clarify that we still
• 55:30 - 56:00 as EF0ero participants may be eligible for EF the next one. So it doesn't preclude you from future funds depend and they'll all have their own eligibility criteria depending on on on where we're at as a company. So yeah, and and just to make sure everybody's clear, like each EF, again, this is EF0 we're talking about today, EF 2425, EF26, possibly down the line, all of those funds could and most likely will
• 56:00 - 56:30 have a different lineup of items that are included in it. So you'll probably see a different lineup for 2425 than you did for EF0. And that kind of follows along with the vision that Charles has of us really starting to tie those EFS to things that we're starting to roll out from the company. So yeah, expect to see a different lineup, but always expect that you um most likely will be able eligible to roll over into the next fund. Right, Megan? I'd just like to finish up
• 56:30 - 57:00 with a comment. I I've been in this industry for almost 30 years. This is a very generous plan compared to what we see in the market. It's generous in a couple of ways. One, vesting is tied to the hire date, not the grant date, which is very participant friendly. The the company is giving up the tax deduction. Most of the time when a uh an employee uh recognizes income, the company gets a tax deduction. They're foregoing this to allow the participants to have long-term capital
• 57:00 - 57:30 gain instead of ordinary income. And even with profits interest plans, you very rarely see allocations. You know, you very rarely see uh discretionary distributions. So, this was designed with the participants in mind. I just wanted to call that out how generous this is relative to market. Yeah, Dan, that is a great call out. Um I one of the big reasons I think it's taken us a little bit um a little while to get here is really working through the complexities of you know we have a lot
• 57:30 - 58:00 of people in a lot of different locations. Um we have different employment contract types. Um you know Charles had a very big vision for this plan and I hope we've delivered it. um because I do think it's going to be a a great incentive to not only retain our current employees but also attract new great talent to the organization. Um and we did we've we've taken a very taxefficient approach on how we built it. So kudos to our finance and tax teams and legal teams for all leaning
• 58:00 - 58:30 in. Um I can't believe we've actually knocked it out of the park. Um leaving everybody almost a minute maybe not a minute but a minute left. Um, I appreciate everybody coming today. I hope you found it useful. Um, like I said, keep an eye out for all the things coming down the pike, all the education materials. Um, and don't hesitate to reach out if you have questions and you'd like to schedule some time. I appreciate everybody. Thank you, Dan. Thank you, Lisa, for monitoring. Bye, Ken. Thank you, everyone. Have a great day. Thank you. Bye. Bye.