Good evening everyone, we're just about to start. Thank you all for joining us this afternoon. My name is Arjun and I'm Speaker Secretary at the Cambridge University Law Society. Before we begin, we'd like to thank the sponsor of our speakers program, Clifford Chance. They offer opportunities to students from first year onwards and you can find out more by visiting their careers website. Today we are very pleased to welcome Christina Black-Laws to address us on the future of legal services. Following her address, Christina will take questions from the audience. The video recording of the Q&A will be edited out and the Chatham House rule applies, so please ask your questions freely. Christina is the President of the Law Society of England and Wales and one of our areas, one of our areas of focus has been the future of legal services. She studied jurisprudence at Oxford University and qualified as a Solicitor in 1991. She has developed and managed law firms including a virtual law firm and setting up the first ABS with the co-op. Today, Christina holds a range of public appointments including member of the Family Justice Council, Trustee of Law Works, member of the Judicial Diversity Forum and Chair of the Government's Law Tech Delivery Panel. She's heavily involved in the technological issues relating to supranational legislative and regulatory frameworks, as well as the need to demystify law tech and empower all lawyers to embrace relevant technology. Without further ado, please join me in welcoming Christina Blacklaus. Thank you very much, Arjun, and after an introduction like that, all I can be is a disappointment to you, so apologies if that turns out to be the case. I'm really pleased to be here and hope that you will listen to me without prejudice because I am from the other place. I hope that this session can be as interactive as possible as well, so do please interrupt me if you have any questions that you want to ask or I'd be very interested in any comments that you have to make about what I'm... What I'm about to tell you... So, where do we start? The legal profession is set to go through a period of really profound change in the years ahead as a transforming society and rapidly technological developments make their mark in the way that we work and the way that we interact with one another. And as you're going to make up the next generation of lawyers, it's perhaps even most important that you are aware of these changes and how legal services will need to adapt to the future. So, I've been asked to speak to you about the future of legal services and I think I'll adapt that slightly if I might and cover it in three different ways. So, I want to talk about diversity and that will be, I think, a key feature of our future. I want to talk about how legal services will be fundamentally grounded in technology. And finally, and probably briefly because I'll run out of time, about how legal services will be increasingly internationalist. But before I start, perhaps if you indulge me a little, I don't know how much you know about the law society and the role that it plays in the profession. So, the law society is the member body of the solicitors profession. There are nearly 200,000 solicitors in England and Wales and the job of the law society is to be the voice of the profession, to drive excellence in the profession and to safeguard the rule of law. And we do that in a number of different ways. So, we engage with government in all its formations to influence them and impact them by speaking out on behalf of justice and on legal issues. We promote the profession, both domestically and internationally, and drive professional excellence by helping solicitors to develop their expertise and their businesses wherever they may work. And this includes ensuring that the very best, the brightest and the best, can join our profession irrespective of their background. So, we are always supporting equality, diversity and inclusion in the solicitors profession. And we also fulfil, and this is often forgotten, a very important statutory public interest function. And that aims to ensure that we have access to justice in our country and beyond, that we protect human rights and freedoms and that we uphold the rule of law. I also wanted to mention that we do have a dedicated junior lawyers division. The division has around 70,000 members and they are aspirant or junior solicitors, much as yourselves. And the junior lawyers division can really support you taking through your journey of qualification, traineeship and admittance as a solicitor. I would encourage you to have a look at their website and follow them on Twitter. So, let me turn to my first theme around diversity and inclusion. It's, in fact, it's one of the main themes of my presidential time. And we know that it is right and just and moral for us to have diverse and inclusive workplaces. But it also is a business imperative. There is a hard-nosed business case for diversity and inclusion. It helps us to attract and to retain the best talent and enables us to understand our clients and meet their needs more effectively. We must, of course, always represent the diversity of the communities that we serve. And just to briefly run through some of the latest stats. So, since this year, women have represented 51% of the solicitors population. And yet we only account for 28% of partners and I'll come back to this in a bit. 2% of solicitors have confirmed that their gender identity, their current gender identity is different to that given to them at birth. And although we don't have, I think, sufficient statistical data about transgender people in the UK, I think it's really to be welcomed that the SRA is now recording this data. So we'll see how that develops. This is a new development this year. There has been an increase in the proportion of Black minority and ethnic lawyers, the AME lawyers working in law firms. And the AME lawyers now make up about 20% of practicing solicitors. So that's slightly higher than the national average of about 15%. And interestingly, BAME students account for about 40% of students undertaking law degrees. So I think we anticipate that we'll see a greater percentage of BAME solicitors in the not too distant future. However, BAME solicitors only represent 11% of partners in law firms. And there is a significant variation of practice areas here too. So firms undertaking mainly criminal work or private client work have a significantly higher proportion of solicitors from BAME backgrounds. On disability, I think we are under recording. So in the latest SRA stats, only 3% of solicitors said that they were disabled, which is compared to about 10% of the working age population. So we need to find out why there is under recording here. I'll talk a little bit more about social mobility and social inclusion later. But as a law society, we definitely see it as our role to encourage diversity in all areas of our profession. We need to help to overcome the barriers by working with firms and working with individuals to ensure that, as I said before, the brightest in the breast can enter our profession and that there is true and genuine equality of opportunity through the legal profession. As I said to you, women make up over 50% of practicing solicitors now. But you might be surprised to know that actually since 1990, women have represented nearly two thirds of new entrants into the solicitors profession each year. So it's been between about 60 and 67% every single year since 1990. So despite having a significantly female talent pipeline, as I said before, we've only got, if we look at private practice, where most solicitors still practice, only about 28% of partners in private practice are women. And that delies to additional and significant features. One is that most of those women are in their own practices, so in small businesses. And secondly, if we look at our largest law firms, you will struggle to find 15% female ownership. So that partner stat includes salaried partners. So it is not uncommon for women to be at 12, 13, 14% of ownership in large law firms. And that says to me that we have a systemic issue here. And that's why in my office holder time, I've been focusing very specifically on women in leadership in law. And what we wanted to do is to try and find out why this is happening. So 30 years of two thirds female, still a quarter of that in terms of ownership. So we conducted a survey. It ended up being the largest ever global survey around this issue. And we had around 8,000 people respond to it. We were supported in it by LexisNexis and the International Bar Association. So it's syndicated to 125 different countries. And so it gave us some really solid data. And we concluded this survey in February of this year. And some of the results were really interesting. I just want to point out a couple of them to you. There was a great deal of agreement that there had been some progress on gender equality over the last five-year period. But that was really skewed by gender. So 74% of the men who answered said, yes, there's been solid, in fact, stellar progress here. Only 48% of the women who responded said that they also thought there had been progress. We asked people what was the key barrier to women progressing in their career? And the vast majority of people responded that that was unconscious bias, which I think is an interesting and challenging issue. When we ran a similar, much smaller survey five years before, the issue was identified as the lack of flexible or agile working. So maybe we've moved on in terms of some of the processes in place and some of the opportunities to be more agile and working. However, unconscious bias is a really difficult one to tackle because it's what goes on in here and in here. And you cannot policy your way out of unconscious bias. It is about the culture of the individuals and the culture of the business. So a real challenge. Another thing, just to highlight one of the other findings was around the fact that many of the business development opportunities and opportunities for promotion were very male orientated. So as and when you get into your law firms, be challenging perhaps about business development opportunities, the opportunities to get close to clients because you'll find still that there is a predominantly around sports and drinking culture, which is not just exclusive for women on occasions, but is also exclusive excluding of other groups. We asked about gender pay and 60% of people said that they were aware of a gender pay gap in their organization and yet only 16% reported that their organization was doing anything to address it.  So armed with this research, we then decided that we needed some qualitative data as well. So over the summer, we have conducted nearly 200 round tables and the round tables, having women's round tables, the purpose of which has been twofold. One is to get that and the Chatham House rules applied to round tables. The first was to get that understanding of what women's experiences were like in 2018. And I can tell you that some of the information that we heard is not only not best practice, but quite frankly illegal, but also to empower women to become leaders and change makers in their own organizations. And to that end, we created a toolkit which was centered around unconscious spias, gender pay gap, women's history. It is next year, our centenary of being able to become lawyers. Prior to that, women were not considered to be persons within the Civicitors Act and therefore under disability and therefore not able to practice law. So we want to celebrate our centenary and commemorate those first women. So we'll be producing a book next year and one of the activities in the toolkit is to surface that information because like almost all women's history that isn't collated and documented and it just disappears. And there is a big program around male champions for change because if you go back to my original stat about at least 85% of current owners and decision makers in large law firms being men, then we are not going to get anywhere unless we can actively engage with those men. And I'd say to you that what is a gender issue becomes a generational issue, particularly with your generation and millennial generation. So it is something that law firms really need to tackle if they want to keep and retain any of their stuff. So we are also going to run men's round tables over the winter, we're starting those. And once we pulled all of this data together and we're doing a piece of academic, an academic literature review which covers the, which is global again, we'll pull all of the insights together and we'll be holding an international symposium in London, predict near diary 20th and 21st of June next year and all of the data will be available for international women's day. This is one of the projects which is about building the profession for tomorrow. And that let me also perhaps in that to talk about something that is around roots to qualification because this is perhaps even more pertinent to you. To qualify as a solicitor used to be only really one route which was to do a qualified degree or to then convert your degree into a qualifying degree like doing the GDL and then doing a further vocation a year and then two years on the job training as a training contract. Now there are other opportunities. So when the solicitors qualifying exam comes in and that will impact upon the wall or if you intend to become solicitors, so that's the end of 2020, that will change the way that we assess whether somebody is of suitable quality to get the title of solicitor. So I'm happy to answer any questions that you might have to the best that I can because the devil will be in the detail. We don't know much of the detail yet about that in the Q and A. But even before the SQE comes into effect we do have other routes of qualifying as a solicitor beyond the LPC and training contract. So I want to just erase your awareness about equivalent means training and that this means that you can have other experiences outside of training contract which can go towards your qualifying period. There's also the qualified lawyers transfer scheme for anybody who has a professional qualification from another jurisdiction. We've had nearly a thousand lawyers qualify in that way and apprenticeships. Apprenticeships we greatly encourage because they are really important to improve social mobility in our profession. If I tell you that 80% training contracts for large law firms go to Russell Group people then it's completely and that is compared to 50% in the civil service. So it is a real issue in our profession. But let me move on if I might to technology because I think that the legal practice of the future will be deeply rooted in new technology and by that I mean technologies that are based on algorithmic determination, machine learning. And this is becoming embedded already in our sector. So by the time you get into practice this will have gone in terms of service delivery from something things that have been piloted at the moment to things that are absolutely fundamentally mainstreamed in practice. And the development of these new technologies having a really transformative impact on all aspects of modern society in our legal sector is no different to that. The external environment continues to shape the way we work as solicitors and we are trying to address that and I'm going to talk thematically really about the legal challenges that are presented by emerging technologies. How these technologies enable the practice of law and improvements in process and the role of technology in the justice system. So first of all, the challenges. So emerging technologies really challenge the existing legal frameworks and are requiring us to, and this is a present tense, rethink how legal services are delivered. But they also pose larger ethical and moral questions about how we want to shape our future. So examples of that use of genomics or drones or facial recognition. And algorithms are dictating all of our lives already. I think quite often enough I'm speaking to an audience of lawyers and I ask them are you using algorithms? Maybe 10%, 20% will put their hands up. But actually, as we know, we are all using and being subject to algorithmic determination every single day of our lives. And we can see some really concerning examples here. So if we look last year at the crash of the pound, that crash by 6%, which was because of currency trends which are triggered by algorithmic trading. Of course, the speed of this trading means that it can trigger flash crashes and being righted before any human beings even realised anything has happened. One of the chief concerns that we have as lawyers and I think it's beholden, honest as lawyers to address or at least to attempt to address these issues is around the issue of transparency. So transparency is a basic principle of justice. The requirement to explain and to justify the reasons for a decision. And this applies across almost all fields of decision making, both in public sphere and within organisations. But as AI algorithms grow more advanced, it becomes much more difficult to make any sense of their inner workings. So there's a danger that AI decisions are taken as slightly more scientific and objective in a way that we recognise that perhaps human decisions are not. Yet, do we really know which bits of data or machine code have led to a particular AI outcome? I'd suggest that we don't, the vast majority of algorithmic determination. AI does allow us to become much more efficient in the use of our time by giving us the information that we want to need because we've wanted to need it before. But these ethical, legal and moral challenges are ones that concern us. And one of the second, I guess, in no particular order, but second design is around bias. So if we are looking at data sets that are of now, they reflect our society perhaps as it is hardwired now or whatever length of time the data set is looking at. And that has been used to train AI algorithms. Do we want to set in aspic our decision-making for the future? If we don't want to replicate the biases in society now, then how do we remove those biases from data sets? Where do we reset to? And these are very, very challenging questions. And of course, if you look into the black boxes and look at the component parts of any algorithm, that will also reflect the biases, interests, assumptions and motivations of the AI program or designer. So there is opportunity for multiplicity of interest and bias within this. At present, there are no universal professional standards for data science. And so this really raises some real concerns here that we need to start to set up standards for data developers in order to build confidence in the use of algorithmic systems. And I think this is particularly pertinent for legal contexts. At the moment, it is the wild west out there. And the best that we can see is organizations like Microsoft and Google who have set up some standards for self-regulation, which are no more really than high-minded principles about how they are going to develop their systems. And of course, not subject to any external or objective check or balance. So the role of ethics in the conduct of electronic interactions between people, businesses and things also raises challenges about the moral implications or the unintended consequences that can come from bringing together the technology of humans. Big data, cloud and autonomous systems provoke questions around security, around data privacy and really around fundamental human rights. Whilst AI and social media challenges as to how we value our work and how we value each other, we can talk later about digital identity. But let me say a little bit about liability because that clearly is a key concern for us. Where should liability lie when damage has occurred? The obvious example, there is autonomous vehicles that we can think of at any time that we are in contact with machine. AI systems are very likely to interact with other systems, the internet of things. So assigning liability becomes really challenging. And as I said before, they're fundamentally reliant upon the data on which they have been trained. So where do we start to attribute liability here? And of course, all AI systems are vulnerable to hacking. So there is a cybersecurity element to this as well. The global distribution of data centers, data sources and intelligent systems also means that there is limited control of data or intended consequences outside of our borders. So, a few, lots of really challenging questions. So we set up the Law Society, a technology and law policy commission which harnesses our convening power by offering a neutral platform for lawyers, technologists, academics, policymakers, ethicists and government to start to address these challenging ethical issues that we are now actively facing into. The commission is a year long exploration of the impact of technology and big data in the justice system. And we are particularly focusing on the use of algorithms in police decision making and asking ourselves questions around the use here and whether it's ethical, fair and free from bias and who is going to be liable if an algorithm proves to have negative or harmful consequences. I chair this commission, but my co-commissioners are a professor of ethics and a professor of computer science. So we're really trying to ensure that we bring all of the actors together because these challenging issues require no group thinking and many minds. The commission is taking written and oral evidence and we also have live sessions. So all of the information, it's all entirely public, is available on our website, including the video of our last session where we had 14 academics coming to give live evidence and answer questions in a sort of select committee environment. It made for quite interesting answers and a bit of good theater. So you can have a look at it if you're interested. Next one is on the 12th of November in the afternoon at the Law Society, where we'll be focusing on the tech community and what they think. And we've also, I think, got Lord Clement Jones, who is leading the Laws on Artificial Intelligence and the Chief Constable of Durham, whose force is using a tool called HEART, which is an algorithmic tool to determine whether an individual is released on bail or offered a rehabilitative program. So it's really interesting to get involved. When Arjun introduced me, he said that I chair a government panel and I wanted to tell you a little bit about the work that we are doing there. So this is set up by the Ministry of Justice. It's called the Law Tech Delivery Panel. I have on it the Chancellor of the High Court, Lord Keane, the government minister, Richard Susskin, Anna Donovan, who is a professor of blockchain UCL, two GECs, Sonia Branch from the Bank of England, and Rosemary Martin, who's the GEC of Vodafone. And what we are endeavoring to do is with full government backing, is to ensure that in the UK, we have an environment which is both nurturing but also vibrant for inward investment in relation to law tech, but also that we can grow the law tech businesses to scale. But its secondary purpose is equally important. These are the immediate aims of the panel, rather than the longer term aims, which will be looking at things like education, legal education and skills acquisition and what needs to change there to fit lawyers or want to be lawyers for the future. But immediately, we need to look at the regulatory and legislative framework and because of our common law jurisdiction, our precedence to ensure that this is also fit for decision making around distributed ledger technology, such as blockchain. I'm hoping that we will have some interesting cases coming to the roles building in the not too distant future, where we will test out and see whether our jurisdiction is fit for purpose in that. But I am relatively confident that the common law is a jurisdictionly, the right way to start to address the flexibility that we have within that start to address some rather challenging questions. The work that we're doing is through task forces and I chair the ethics task force and rely heavily upon the work that we're doing in the law society and the commission. But the other task forces are around commercial dispute resolution, the jurisdiction, regulation, investment, commercial dispute resolution and education. So we will be initially reporting at the beginning of next year as to the things that where the blockers are and where the opportunities are. It's also important I think in this space to think about access to justice and unmet legal need and how new technological development can ensure that ordinary people and even perhaps people at the vulnerable end of our society can actually access legal support. Sometimes I get shot down for this but I firmly believe that access to justice does not always necessarily need to be access to a lawyer and that with some really good technological support that we can ensure that people can self help which means that they can get to a point where either they resolve their issues themselves or they can identify that they have a clear and perhaps at that point complex legal issue where they need professional help and support. And again, this is something that we want to work with government more to ensure that thematically is also being addressed. One last thing on technology and what we're doing, we have partnered with Barclays Bank with about a dozen of our largest law firms, PWC and some academic institutions and this is a joint venture to build the first industry specific incubator which we launched in August in Notting Hill. The incubator has 16 law tech startups in it at the moment and we are developing that further. We aspire to have incubators across the country and indeed Barclays have, I think they already have an Eagle Labs incubator here in Cambridge but that's not law specific. The purpose of the incubators is to ensure that this is much more open sourced, that lawyers from any walk of life can engage and support and influence, co-create the development of products and services that are going to be useful into the future. So it's an opportunity to build a community and on the back of that we will be working hard to ensure that we can help to demystify technology because this is a real challenge for all of our lawyers in current practice. As lawyers we hate to ever admit or ever be seen to not know something and so therefore new technology is often avoided but actually we can get the lawyers up close to the technologies. They can see that this is actually really supports and helps their lives in terms of efficiencies, in terms of their own career development, in terms of your career development, hopefully you will not have to spend weeks upon weeks undertaking contract review due diligence and all those sort of things which are actually quite stressful as well as being boring because you miss that one part of that in that clause, then you're in real trouble. So let's automate all of that and let's get you doing the really interesting work and getting in front of the clients from day one. So that's a big piece of work that we're doing to try and support that. Conscious that I have run on a bit but I did start a little bit late, didn't I? And I just wanted to say to finish off with my point about internationalism. So the future of law, as I said before, technology is no respecter of boundaries of any nature whatsoever and those are legislative boundaries as well. And we as in the UK are very well placed to take advantage of all of these new developments. St. Louis is a global legal centre. London houses seven out of the 10 is home to seven out of the 10 largest global law firms. 87 out of the top 100 global law firms have a base in London. And despite what is said frequently from by competitive jurisdictions, Brexit, and I can't get through a single talk without saying the word, Brexit doesn't impact on this. Everything that makes our jurisdiction attractive remains. So the independence of our judiciary, the breadth and depth of experience of our legal professionals and also our common law and the sophistication of our common law all in place, Brexit or no. And it's quite important that we put that case now being clearly to our global audience. And we're doing that through a global legal centre campaign which is twinned with a government campaign around the legal services, the our great campaign. And I can see that in the future, as society transforms as well, it becomes smaller, that these opportunities to cement the UK as a leader and a trendsetter in legal services will increase. But there is absolutely no room for complacency here. We need to be pushing ourselves to be in the vanguard of technological developments to ensure that we have the right people in our profession to help us to support that and that we work together with colleagues from other professions and disciplines. Now, I'm not, in the least, trying to bang the drum. I am a true fought for just for the UK, a true internationalist and we will continue at the Law Society to work very closely with our colleagues in Europe and beyond because we have some huge and important common aims in that to safeguard the rule of law, to protect and promote access to justice and also the highest professional standards. So, I'm probably going to end there, I could say more, but I'm going to open the floor to questions or comments and thank you very much for listening so far.


Hello, and welcome to the session in which we will discuss employee stock purchase plans or known as ESPP. What is ESPP? That's the first thing we need to know. Basically, it's when the company grant you the right as an employee to buy the shares of stocks. Is that really right? Because you can buy any shares of stocks at any time you would like to, whether you are an employee or not. Well, guess what? They will give you a discount, so they will sell it to you lower than the ongoing price. Now, one Christmas, literally, I work at Walmart, third shift, and every time you will go to the restroom, there was a sign and they all have the stock price of Walmart, wherever that stock price happens to be that day, and they will say, next depends on you, to remind their employees that they own shares in the company, and because they own the shares, if they work harder, the stock price would go higher and they are better off. So a company like Walmart offers their employee this employee stock purchase plan, and I told you that I work at Merrill Lynch at some point and I used to handle employee stock options and I also we had employee stock purchase plan. So how does it work? Let's dive into it. Let's assume you work for Walmart and Walmart will tell you if you would like to enroll, once you qualify to enroll, there's a period where you can enroll called the offering period or think of the offering period as the grand day. There's an offering period and if you enroll during the offering period, at some point, it's usually the end of the quarter. Usually it's the end of the quarter. You can exercise to buy the shares at a certain price, to buy the shares. So what you do, let's assume for the sake of simplicity, you are making a $2,000 a week and you will tell them I would like to deduct, let's say, $20, well, $200, 10% of my paycheck to buy those stocks. So what happened is this, every week you work for Walmart, Walmart will put away from your paycheck, $200. Then here comes the exercise date. Now on the exercise date, they will buy the shares of Walmart. They will buy, let's assume you end up with having, let's assume you enrolled for five weeks, you had $1,000 in total in your escrow account, which is an account that's yours, but Walmart is holding it. Now on this date, they will have, they would say, for example, they will have the policy. The policy is basically usually it's 10% or 15%. I don't remember Walmart. So whatever the ongoing price is, they will buy the stock at 15% of the market price. Either they would use the fair market value of that date, they could use the fair market value of the offering price. Simply put, they would allow you to buy the shares at a discount. That's basically what it is. So as an employee, you can buy the shares at a discount. Well, someone else, so let's assume the stock price is $64.15. Let's assume someone else wants to buy the stock, they will pay $64.15, if it's $64.25. If you want to buy it, you'll pay 85%, you'll pay $54.63. So you'll buy the stock at a discount. That's basically what it is, and that money is deducted from your payroll. In a nutshell, that's what employee stock purchase plan is. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation, as well as your accounting courses. My CPA material is aligned with your CPA review course, such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today, no obligation, no credit card required. Now, it's listed under stock options, and the reason is because it works from a tax perspective. It works like an incentive, it's a qualified stock option plan. Specifically, it worked like the incentive stock options that we talked about in the prior session. So we did cover the non-qualified stock options, we did cover the incentive stock options. In this session, we will focus on the taxation of this ESPP. So the first thing is ESPP has to be qualified to be considered an ESPP to qualify. Well, what are the qualifications? Just like an incentive stock option plan, you have to have certain criteria to be considered an incentive stock option plan, to be considered the qualified stock options. Well, the qualification is the employee must be in writing and approved by the shareholders. So the shareholders say, yes, we want to grant, we want to have this plan for our employees. The employee are required to exercise their option within a period of 27 months from the date on which the options were granted or offered. So after that grant, you have 27 months to exercise, usually it's within 3 to 6 months. All full-time employees can participate except highly compensated employees and those with less than 2 years of employment should be included in the plan. So when I worked at Christmas at Walmart, I could not participate because you have to be there for 2 years. And if you are highly compensated, one of those top individuals at Walmart, also you cannot participate because this is for kind of for lower level management. Each employee receiving stock should not own more than 5% of the company voting power, including its corporation, parent and subsidiary. Simply put, you cannot own more than 5%. Forget about Walmart. You know, it's very hard to own 5% of Walmart, even for large, huge investment banks. But the point is, you cannot be, you cannot own 5%. You cannot be a large, in quote, a large shareholder. Also, the exercise should be at least equal to 85% of the fair market value of the company at the grand date or at the exercise date, whichever is lesser. So simply put, they'll give you the discount and discount is basically the maximum discount is 15%. It could be 10, it could be 5. Sometimes they don't give you any discount. Okay, you just, you can buy it, you know, you basically will deduct money from your paycheck and you'll buy the company stocks. If you want to do that, if you want to do that, that's fine. There's no really any incentive, but you're hoping that the stock price will go up and each employee is allowed to acquire the maximum of 25,000 per year. Now you can buy more stocks, but it cannot be considered as an ESPP, employee stock purchase plan. Also similar to incentive stock option, once the stock is exercised, it must be held by the employee for at least one year after the exercise date and two years from the grand date or two years from the offering date, just like the ISO, the employee stock option plan. We have an offering date or a grand date. So let's assume the offering date is September 1st, 20x2. Now let's assume the exercise is was September 1st, 20x3. So you exercise it a year later. Now you bought it and you held the stock until 9, 1, 20x4. So you held it one year from the exercise date. Okay, now you can sell it here. Now it's considered capital gain and you have to hold it two years from the grand date or the offering date. That's what we're saying exactly like incentive stock options. Also the employee should remain employee for the corporation from the grand date up until three months before the exercise date and this period is extended and if the option was granted due to a permanent and total disability. Now what are the taxation of ESPP? So what are the tax consequences? Now remember, here all what you're doing is you're buying stocks. Similar to the incentive stock option, it's not granted as compensation. You are taking your own money from your salary and asking the company to use it to buy stocks. Therefore the employees are not taxed when the option is granted of course or the option when exercised. When there's tax consequences, when you actually sell, as a result of the option lapse and exercise, the employee are not allowed to recognize any loss because they did not recognize any income to be taxed in the first place. So it's not taxable, it's not deductible. If the exercise price is less than the stock fair value on the grand date, the employee recognize an ordinary income when the price is sold. So if you bought it less than the fair market value of the exercise price is less, usually it is that portion is ordinary income. The difference between the exercise price and the fair market value of the stock when sold or the difference between the exercise price and the fair value of the stock when granted depending on which date we are looking at. Now the remaining is classified capital gain and we'll work an example, don't worry about this. So simply put the discounted part, the discounted part, the amount that's below the fair value because you bought it below the fair value, that's considered ordinary income. Basically they gave you a discount. Now if you made any profit after you bought the stock, you have the basis, any profit above the fair value it's treated as capital gain. So the remaining is capital gain. Now what are the tax consequences for the employer for the company? There's no tax consequences. Why not? Because all what the company is doing is issuing stocks. You're not going to get a deduction for that. Simply put they're issuing stocks to their employees. The employee said we're going to invest in the company, take part of our salary and buy the stock. The best way to illustrate this is to look at an example. March 15, John received an employee stock purchase plan as follows. So we have an ESPP in effect, the number of shares to be purchased 200, they can buy it at 90 dollars. The fair market value of the stock at the option is at the option grand date is 100. Simply put they're giving them a 10% discount. On April 3rd, year two when John, when the fair market value was 120, John exercised the option. They bought the option and they waited until May 10th, year three and that's when they sold it. They did really good. I mean this John did really good. Simply put they end up, all in all they buy something for 90 and they sold it for 180. That's what they did because that's what the exercise price. Should John report any income on the grand date? The grand date is when they told you you can buy the stock for 90 dollars. The answer is no, there's nothing. You don't recognize any income, nothing happened. All what they're saying is you can buy the stock for 90 dollars if you're interested, sign up for the plan and by the end of the quarter whatever money we deduct from your paycheck will buy the stock. There's no tax consequences. Determine the adjusted basis of the stock held by John on April 3rd. So April 3rd, when the fair market value of the stock is 120, well guess what? You bought them, you paid 90 dollars. Actually John paid 90 dollars. They have money deducted from their paycheck and they bought the stock at 90 dollars. So they have $18,000 deducted from their paycheck and that's their basis. That's exactly their basis. What is the amount and type of income that John would report when they sold the stock? Now when they sold the stock they have 200 shares. They sold it at 180. This was the proceeds. Now as of May 10th, John already met the requirement for the holding period. So this is a nice. So therefore he should recognize a gain of 18,000. How did we get to that? Well the proceeds are 36,000. The basis are 18,000. But now what we have to do, we have a gain of 18,000. How is that gain is treated? Remember the amount that's below the exercise price. Remember we bought it for 90. On the grand date it was 100. So there's a $10 discount. We bought it at $10 discount times 200 shares. Of this amount, 2,000 it's going to be considered ordinary income. And what's not ordinary income, it's going to be considered capital gain. And this is what John likes. Like likes the capital gain. But that $2,000 because of that $10 discount will be treated as ordinary income. What is the employer's tax consequences? In other words, do they have any deduction? If so, how much? And the answer is no. ESPP are not provided as a compensation. And as a result, the employer don't receive any tax deduction. All what happened is you took your money, which you earned, you went back and you told the company, I want to buy the stock. Well, in this situation, the company sold you the stock at a 10%, not technically 10%, but a $10 discount. I'm not sure if that's considered 10% or not at a $10 discount. Let me just put the $10 discount. Okay. Yes, exactly. If you take 100 times 10%, that's $10. They gave it to you at a $10 discount. That's all what happened. What should you do now? Go to Farhat Lectures and look at additional resources to help you understand whether you are an accounting student, CPA candidate or an enrolled agent. Good luck, study hard, invest in your accounting career. It's worth it and stay safe.


This is Think Tech Hawai'i, Community Matters here. Aloha, and welcome to Business in Hawai'i with Reg Baker. We're broadcasting live from the downtown studios of Think Tech Hawai'i in beautiful Halalulu, Hawai'i. We broadcast every Thursday from 2 to 2.30, and we focus on success stories of businesses and individuals here in Hawai'i. Hawai'i has some challenges. We've got regulatory issues, tax issues, and staffing issues, but we do have people that are making it work, and we want to hear those stories and share with the audience how that happens. So, today we have Savin Patel, who is the president of Infinium Interiors. Savin is a veteran, and he has transitioned, and he has become very successful at what he's doing now, and we're going to hear his story. Savin, great to have you on the show. Well, thank you so much for having me. I think this is the second time you've been here, right? Yes. So, thank you. All right. So, we're going to hear a little bit more. I think the last time you were here, you were kind of sharing the show with someone else, and we were talking about two different stories, and you had such a compelling story. I thought it would be good to get you on again and delve a little bit more into the details.  Where are you from, and how did you get to Hawaii? Sure. So, I actually, I was born in India. So, I was born in India up until about the age of six. I moved to the U.S. So, my parents actually, so my sister and I, my parents moved a couple of years before my sister and I, so we were raised by our grandparents for about two years. So, we moved to New Jersey. That's essentially where I grew up. Great town. I'm from Jersey. I was born in Elizabeth. So, I'm familiar with New Jersey. Yeah. Right? Yeah. So, we grew up in New Jersey. You know, nice place to grow up for the most part. I was a bit of a challenged kid, to say the least. And after my time in New Jersey, I joined the Navy right out of high school. So, I joined the Navy, wasn't really ready for college, and so I spent a good portion of my time in the service on submarines. So, I was on four different fast attack submarines. My first tour duty was Hawaii back in the late 90s. Then back in about mid-2000s, 2006, I came back to Hawaii after numerous tours. I spent a little bit of time on submarines out of Pearl Harbor. At the time, I was a quartermaster, so I was involved with the navigation, and I was on the SSN 583, which is a Sargo, originally designed as a diesel and then transformed into a nuke. So, it was an older boat. What did you do when you were on submarine? So, I was a Yeoman, so I was mainly administrative HR type payroll when I was junior. So, the more senior I got, I was a senior chief. By the time I left the service in my last tour, I was a senior listed advisor, and the acronym was Chief of the Boat. So, you were the cop, right? Yeah, I was the cop. So, I was the advisor to the captain, and mainly dealt with personnel, operational type issues, operation of the ship, health of the ship. Well, it's great to have you here again, and thank you for your service, and it's kind of like talking to a brother-in-arms here. It is. And so, you finished and retired from the Navy, sounds like? So, actually, I didn't retire. I spent about 15 years in the Navy, and that's always a topic of conversation. There's a longer story behind that, but I got to a point in my career. I spent the 15 years that I was in the service. 11 of it was out to sea. It's tough. And so, it's a burnout when you're spending that much time out to sea. When I calculated the time, it was about eight years of total time spent under water. If you can imagine that, you know, kind of poking holes in the ocean throughout the world essentially. So, I got burnt out, and I was ready for a change at that point, and that's when I kind of took the leap. It's kind of funny about the Navy, they do tend to send you to sea. Yeah. Yeah, it's tough. I was, I guess, fortunate, unfortunate, whatever you want to call it, but I ended up doing a couple tours in Vietnam, and I was there during the evacuation of Saigon. So, I got to have some boots on the ground there for a while, and, you know, that helped break the monotony a little bit. It's a tough business. Yeah.  So, I transitioned out of the Navy, really had no idea what I wanted to do. It's hard for any service member that's been in the service to try to translate their skill set into the civilian world. Sometimes it doesn't translate to the world. Well, sometimes it doesn't, and I'm a great example of somebody that didn't really want it to translate either. I wanted to look for something much different, more of a business opportunity, something that I can get my hands on and really get involved with and kind of do it on my own. So I got into the commercial furniture business. You know, it was almost happenstance, because I was working with a sales recruiter, so interviewed well for it, got the job, then I was doing a lot of federal government work. It was the territories here for the military and also overseas in Asia. So very, very interesting job and position, and after about three years, I transitioned out of that. I loved the business. I loved the interior design facet of it. I went off and started Infinium Interiors at that point. So you started Infinium from scratch? From scratch. From scratch. Very good. But you also went to school for a while, too, here, didn't you? I did. When I left the service, I didn't have a college education. I was partially done, but I didn't have a bachelor's degree. So I completed a bachelor's degree immediately following that. I went into an MBA program at the University of Hawaii. That was really my kind of college time, per se, because it was kind of, you know, in classroom type of education. Well, it also gives you time to think a little bit, too, and kind of plan out what your next step is going to be. Yeah. I think it was, I think for me, at least going to college later in life was highly beneficial vice-earlier in life and kind of life skills that I picked up while I was in the service and then being able to apply it in an educational environment, I felt for me was a lot more beneficial. You know, and I think maybe, you know, people value those life skills and experience a little bit differently today than they did back in the 70s. When I transitioned out, you know, I was a little older, and then I went to college. And so by the time I graduated from college here in Hawaii, I went to HCC and then UH. By the time I graduated, I was 28 years old, and I was going to work for some of these companies where they were hiring people that were 22, 23 years old. And that was, you know, it's illegal now, but that was a big issue, and that was something that I had to explain over and over and over again about how am I going to work for people that were younger than me. And I reminded them that when I was in the military, almost all of my bosses were younger than me. So it wasn't an issue. So anyways, you know, it's these little things that make it a little bit difficult or challenging at times for military to, you know, make that transition. It is. It is. And you know, I think the military training that you get is, I mean, it's immense. There's so much that you get out of the service that they get some matter of taking that skill set and seeing where it's going to best fit for you and for whatever organization you're going to join. Right. Very good.  Right. So again, one of the key benefits of being in the military is you're very adaptable and you learn things very, very quickly.  And after about the third year that I was working for this company, it was time to kind of move on and do what I really wanted to do and be in charge of my own destiny and, you know, run and operate my own business. And you know, I was right in the middle of an MBA program and I kind of had this idea and I kind of just went for it. I went for it and thinking, okay, it's going to be a slow start. You know, it doesn't have to be, you know, push, push, push, we'll grow slowly, but it just didn't work out that way. It naturally just went very fast, very quickly. We grew, you know, to levels that I couldn't even imagine. And it's been great. It's been great. Well, and I'm going to want to spend some time talking about the company and what some of the challenges were and what it does and how it does it. And I'm going to save that a little bit for the second part of the show. I want to ask you a question right now that, again, is like a personal experience. But what was one of the bigger challenges when you were transitioning from the military into the civilian workforce? And you had the advantage of the education, but was there any particular challenge that you had to overcome as far as how people perceived you? I think it was uncertainty was probably one of the biggest things that I felt like I had to kind of overcome, and I think other people had to overcome as well. Uncertainty in what respect? Uncertainty in the sense of you do have some very tangible skill sets when you get out of the service, but is it really going to apply to, you know, a particular organization? And a lot of times the answer is no, it just isn't. You're going to have to learn and you're going to have to start over. You're not going to be in a management position, especially from an enlisted side. You're going to start probably somewhere lower level and you'll have to work your way up. And it's not to say that you can't move up fairly quickly. It can be accelerated. It could be accelerated, but you do have to put the time, the effort, and you have to go through the process just like everybody else does. And just like any other job, you've got to prove yourself. And if you do, then you'll be rewarded for that. But sometimes, you know, the skill sets can be one thing, but it's the, I guess, the traits of the person that can really make a difference.   And so I think with that can-do attitude, it can almost be a detriment in a lot of ways when you get into the civilian sector, because you are, you've learned to push hard for a very long period of time. And, you know, the people that you're around now generally may not be the same way. So you have to, you know, you have to force yourself to slow down a little bit, be a little more deliberate about your thinking, how you're going to approach problems, because you are going to approach problems in a much different way than you would if it's in a service, because you're going from an environment where it's very structured, very written down for you, you know, you get told exactly what to do for any particular situation. And how to do it. And how to do it, and you practice it, where when you get into the civilian world and more importantly, in a business environment, it's very ambiguous. It's more ambiguous than you can imagine, because there is a lot of unknowns and there's a lot of things, you know, aside from just the people side that has a tremendous effect on a business. That's right. Interpersonal skills are important in both environments, but maybe a little bit more so in a civilian environment, because you do have to collaborate and work together. And if you're too aggressive and too can-do-ish, I guess you can kind of push some people away. More detrimental. Yeah, no, that's a good point. So patience is probably a good virtue then. Yeah.  I've had mine, you've had yours, but, you know, the press of villains, you know, to continue a pursuit of what you want to accomplish, that's a positive too. So you can't give up easily, you got to keep working at it. And so I think there's a lot of wisdom that, you know, people can share and learn from us, you know, in coaching them through this process. So thank you for sharing that. Yeah, absolutely. We're going to take a short break. We're going to be gone for about a minute, and we're going to come back. And then I want to switch gears a little bit and start getting into the company and what your thought process was and how you selected the industry and the company and how you set it up and got it going. So I think there's a great story there. As a matter of fact, you already mentioned that it grew quickly so that we want to hear about that. But this is Business in Hawaii with Reg Baker. We're going to take a short 60-second break, and we'll be right back. This is Think Tech Hawaii, raising public awareness. Hi, I'm Pete McGinnis-Mark, and every Monday at one o'clock, I present Think Tech Hawaii's Research in Manoa, where we bring together researchers from across the campus to describe a whole series of scientifically interesting topics of interest both to Hawaii and around the world. So hopefully you can join me one o'clock, Monday afternoon, for Think Tech Hawaii's Research in Manoa. Back to Business in Hawaii. I'm Reg Baker, and I'm here today with Savin Patel, and we're talking about Infinium Interiors, which is a furniture-type company, and I know that's a poor description, so I'm going to let Savin describe the company a little bit more. What exactly is it that you do? Okay, so Infinium Interiors, we're a contract furniture distributor. So essentially, the process works very simply. We do a lot of consultation with the client, and our clients include just end-users that maybe owners of companies, COOs, executives. That's a picture of the website there, isn't it? That is, that's our website. So our client base is not just end-users, we'll work with architects, designers, contractors. So there's kind of this stakeholder network that we're working with continuously on a variety of different projects. So where we come in, we do the consultation with an end-user client or one of the design firms. We help with product selection, we also help with the aesthetics. The larger part, aside from that commodity piece of furniture, is we really value service, and the service part includes our ability to do some light interior design work, space planning work, be able to provide visuals where a client can see what their space will look like, have them move around in the space, if we can, and that kind of helps really dial in the scope of what we're trying to achieve for the client. So they can get a real feel for what it is that they've designed and they're, you know, I guess putting together, they can really sense what that's going to feel like. They can sense it, we invite, you know, for them to get employees involved with some of the decision making, some of the decision making process, not all of it, but some of it, which is helpful because, you know, from my perspective, from our company's perspective, is that, you know, our customer are those employees, right? They're the ones that we want to make sure when they're operating in that environment, that is it going to be satisfactory? Is it going to provide what that client is looking for? Whether it's collaboration, whether it's the need for some privacy, whatever it might be, and is it going to be a workplace that's going to help them grow as a business and be branded a specific way as well? Well, and they could also be a great source for promoting the company, whether they're telling everybody that comes over to visit, oh yeah, you know, if any of them put this together and they're great to work with, I mean, it could be a good testimonial. It is, it is, and I will tell you our biggest marketeers are our customers. But, you know, we do some light marketing, but a majority of our business is generated through our customer network that we have, through our partner network, you know, and we are with the customer forever.  And we've gotten to the point where we've just taken away the warranty. We said, if there's ever an issue that you have, just call us, right? It's in our best interest to make sure that you're taken care of if you do have an issue. And that customer service and that referral network, you know, the coconut wireless, word of mouth, all right, and that's powerful. And that's probably one of the best ways to get referrals. It is, it is. And I think, you know, I would attribute a lot of that to maintaining those relationships, developing them, fine-tuning them, staying in touch with people. You know, the people side of business is probably the most important, because if you don't have that, you really can't do business. That's right. Well, you've got to have that relationship, you know, and relationships are very important regardless of the industry or the location you're doing business. Can you just, you know, spend a minute and, you know, maybe I just want clarification. If I was going to open a new office, when do I reach out to you? Do I talk to my architect first, or do I talk to some other person, or do I get you involved right from the get-go? And how does that all evolve? Well, two ways. If there is an architect or designer involved, we always encourage, you know, if you're going to work with us or whoever it is that you're going to work with, try to get that furniture dealer and distributor involved early. And if it's a larger build-out, and maybe with an architectural design firm, they've got their own network, so they'll reach out, they'll take clients out to some of the showrooms to see the product and kind of meet the people that they would be working with. That's one way. What I would tell you, furniture is usually forgotten about because there's so much going on from the time that delivery would happen of furniture that it tends to be kind of, you tend to be late in the game a lot of times. And we try to be preventative as much as we can to get in there early, to make sure that everybody understands timing. Well, I would think so because sometimes when you're building things out, and then furniture is the last thought, I guess the question is, will it fit? Will it fit, right. And sometimes you're limited to what will fit, rather than what might work the best. Will it fit? Do we have a budget that's going to work, right? And that's oftentimes the scenario. The earlier the better is what I would advise you. Well, it sounds like if I'm going to be moving into a place, and I'm working with an architect, to get everybody working together at the same time is probably the best solution. That's the best way. And do you have any limitations on the type of furniture that you can help locate and purchase and bring on board? Or how does that work? We're pretty unlimited as far as access. There are some exclusive areas that we can't really access. But, you know, we've got, for projects, we've actually had, we've done production in overseas. So we've been able to actually build something. And Bali, we've done that, we've brought container loads worth of furniture out here. And actually, it's a different business that I'm actually looking at at this point. But so our ability to source product at some very deep discounting for a client is pretty immense. Wow. So it could certainly pay to bring you into the loop sooner versus later.  I highly recommend it. Yeah, I would imagine. Now tell me, you said that your company experienced some great growth and I can understand why, but it's exceeding your expectations? It's exceeding my expectations in a couple of ways. You know, when I first started back in 2014, it was myself and after about six months I had my first employee. She's still with me. She's awesome. And who is that? So Ariel. Ariel Murray. So hi, Ariel. And so she's still with me and she did a fantastic job. There was just her and I working out of my condo. And you know, when I started, I pretty much put my life savings into the business, right? Me to the point that I still remember and I still joke about it. I remember I was looking at my bank account and I had $2.85, right? And here I am a 35-year-old with $2.85 in my bank account. And you know, I kind of understood the risk, but I also understood kind of the reward side of it and doing that. Because when you do grow very fast, it requires a lot of capital. And if you don't have a bank that's willing to lend to you, which most banks aren't going to lend to you that early, you are going to have to fork up your own money or figure out some other way of being able to access capital. You know, and that's a point that a lot of people either don't plan for or don't appreciate.  And that's something that's been proven over and over again. But a lot of people that actually work and, you know, the employees that are in the work environment, labor force, they don't realize that a lot of these businesses start where the owners are taking huge risks. They're gambling everything to make this work. And you know, you need to be appreciative of that. You know, there's some, you know, not very many people are willing to do that. Yeah, and I think there's a reasonable way of doing that. I think you do need to protect yourself. I mean, I did protect myself. I knew that I was going to be that low in my bank account, but I also knew that there was going to be a return that would happen in a fairly reasonable amount of time. So that, I mean, you've got to understand risk mitigation, because if you don't, you're not going to last very long. And that, you know, I would advise anybody of that, even whether you're undercapitalized or not, you've got to be careful of your cash flow, right? Don't worry so much about your profit, worry about your cash flows. What's coming in, and you've got to manage that very well. And I guess part of the risk mitigation is having a good ability to forecast and look a little bit down the road to see where you're headed. And if it's in a good direction, great. But if it's not, fix it before it's too late. Sure, sure, yeah. So that becomes an important part of the process.  You know, your business is surviving, it's grown well, it's better than you expected. What was one of the challenges that you encountered? I think the challenge would be when you're the new person on the block, the new kid on the block, you're starting, whether you've had relationships in the past that could translate, you're still starting from scratch. So you have to build a lot of relationships, and that means that's a lot of work in its own.  But building that, building the relationships and being able to develop the business, you know, the most challenging part for our business, and it won't really change is that the length of time that we turn over and order or until cash does start coming in can last, it could be 90 to 120 days at times. So it's a very long period, and so as you're building, you've got to have this funnel of projects that you've got going, and then the orders start coming. And that was probably one of, that was a big challenge. It wasn't so bad because it was a few people, not a lot of people that you had to worry so much about. I think the other challenge that I had was really, you know, what's my next step? Where do I go from here? What am I looking for in this business? Because your mind is just your scramble mode, right? Every day you're going out there, you're looking for every rock that you can turn and you may go back to that same rock and turn it over again. Sometimes it works, sometimes it doesn't, but it feels like a fight at times. A trial and error, trial and error, that's what it takes. And different, for example, advertising, what works, what doesn't work. Sometimes you've got to try and spend a little bit of money and see what triggers those sales. It's not a simple process, but it's that constant trying to make things better, looking ahead, where am I going, and what do I have to change to get there? You've got some expansion plans. We do, we actually have quite a bit going on that I'm looking at right now. So from the commercial business side, we're looking to expand markets external to Hawaii. So we're looking at Chicago, which I'm pretty bullish on Chicago. I think that is the place that we're going to be next from our commercial furniture side, which will be another year and a half, two years before we get there, but we're kind of putting things in motion for that to happen. But then in case in point, you're planning for that and that's two years down the road. Right. So that's the type of foresight that you really need to develop. Right. And I think you have to have that because today I may be saying to you that we're going to be in Chicago two years and tomorrow something may totally change that you want to know that well ahead of time, when you're getting ready to move offices or expand out to a certain area or certain product line, whatever it might be. The other expansion side is here locally, and which is our contract residential side. So we've already have projects that we're working on, a lot of the new development projects for micro units specifically. Wow. So it's very modular furniture, very different. And then we're looking to open up an actual showroom just for contract residential. So the product mix is very different than what most people would see on the island. There's an appetite for it. So we've found this niche that we feel like it's going to be good for the market. Very good. Well, it sounds like exciting times, a lot of opportunity. You're a good model to emulate for people that are either in business or coming out of the military and wanting to go into business. So congratulations and thank you for being on the show. Thank you very much. Unfortunately, we've run out of time. So we need to, I guess, maybe schedule another follow-up to see how things are going as far as Chicago is concerned. All right, thank you, Sam. Thank you very much. This is Business in Hawaii with Reg Baker. We broadcast live every Thursday from 2 to 2.30, from the Think Tech studios in downtown Halalulu. We have some very sophisticated technicians that help us produce the show, and we want to say thank you to them. Until next week, aloha.


Twinkle, twinkle little star. I imagine that hundreds of thousands of generations have wondered what they are. Here I am again in my backyard, looking at the Big Dipper. On a clear dark night, I can see around a thousand stars.