disqualifying disposition report

The Disqualifying Disposition Report for private companies contains transactions of certificates that Carta identifies as having been created as a result of an ISO exercise. These transactions are evaluated against two qualifying rules:

  1. The certificate must have been held for 2 years after grant prior to a sale.

  2. The certificate must have been held for 1 year after exercise prior to a sale.

If both conditions are not met, the transaction is considered disqualifying and may have tax implications for the stakeholder and issuing company. Consult your legal counsel for guidance.
The ordinary income is calculated as the lesser of the bargain element or actual gain from the disposition.
The bargain element is the difference between the FMV on the date of exercise and the exercise price.
The gain from the disposition is the difference between the sale price and exercise price.

Consider the two examples below, where the amounts are listed for each share:

  1. If a disqualifying disposition occurred with an exercise price of $10, a FMV of $20 on the date of exercise, and a sale price of $15 in the future, the ordinary income per share would be $5, which is calculated as (sale price of $15 - exercise price of $10).

  2. However, if the sale price was $25, with no changes to the exercise price or FMV on exercise date, then the ordinary income per share would be $10, calculated as (FMV of $20 on date of exercise - exercise price of $10). In this case, there would also be $5 of Capital Gains.

When the Transaction Reason field in the report displays Missing, this means that the transaction took place before the Transaction Reason value was recorded in-platform. Contact Carta Support to have the correct Transaction Reason recorded.

Exporting the report

Navigate to Essentials then Run reports. Search for the report by name and click the name or the three dots to the right and select Export.

Enter an Earliest transaction date and a Latest transaction date and check the box to indicate understanding of the report’s limitations. Click Export to Excel.

After a report has been generated, it will be available by clicking Downloads in the upper right corner of your account.
Limitations
If your company has held tender offer events prior to onboarding to Carta, the system will not know of sold certificates that were originally issued due to an ISO exercise. These certificates will not be presented on the report.
If your company has manually issued certificates as a result of an ISO exercise, without processing the exercise on Carta, the system will not know of sold certificates that were originally issued due to an ISO exercise. These certificates will not be presented on the report.
If your company has manually issued certificates as a result of an ISO exercise, without processing the exercise on Carta, the system will not know of sold certificates that were originally issued due to an ISO exercise. These certificates will not be presented on the report.