Stock Options Question

Factual Questions
1

There are reasons why I don’t invest in the stock market. One is I’m notoriously bad at predicting the future, and an other is they are hell on taxes. That’s why I never signed up for stock options when they were first offered. Give me my compensation in cold, hard cash, thank you.

My employer has now decided to “incentivize” (yes, some one actually said that) me by giving me Stock Options. I tried to get the cash equivalent, but they want me to “think like an owner.” So I’m stuck with them. Any how, I know there are some people with actual financial experience here. Would someone please explain to me what the hell this means?

What’s my next move?

2

They use them as an incentive to

  1. Do a good job so the companies stock goes up, and
  2. Stay at your job for at least another year.

As long as your companies stock goes up it’s free money to you. If company stock goes down you don’t lose a thing.

They issued you 100 shares at $11.71. This doesn’t mean you’ve just made yourself $1171.00.
It means that after 1 years time if the stock has gone up you can collect on the difference minus taxes.
So if your with the company next year and the stock is at $16 you can “buy and sell to cover” where you’re in esscense buying the 100 shares x $11.71 ($1171) and then selling them back for 100 shares x $16 ($1600) and making $429 in the process (no you don’t have to come up with the $1171). Take capital gains taxes into account and you’re probably left with $250-$300.
The more your companies stock goes up the more you make.

3

You probably need to investigate a broker of some kind to deposit these options into an account. I have done this with stock, but not options so I don’t know the details. You didn’t give us the detail, but I would guess that these options expire in ten years. Generally you have the “option” of selling the options themselves. The value of the option is based on several things, the option price, the current value of the stock, and the length of time to option expiration and of course how the market feels about the prospects for this company in the future (in a broad sense). Selling the option is what you would do to essentially monetize it if you wanted to. You could exercise the option as well and then sell the stock, but that is probably more of a hassle.

4

Actually, “buy and sell to cover” isn’t the right term. Usually, this type of transaction is called a “same day sale”. This implies that you “exercise” the options (i.e., give them the “strike price”, in your case $11.71 per share, and they give you 100 shares of stock) and sell the shares (i.e., sell those shares you just exercised on the open market). In this type of transaction, no money is required up front from you, the employee.

“Buy and sell to cover” often means "exercise my options, and then sell just enough of the shares on the open market to cover the strike price (and sometimes the taxes, sometimes not). This leaves the employee with fewer shares, but those he owns outright.

Same day sales are usually the best and simplest way to go.

J.

5

There is no downside to you although they could very well always be worthless to you as well. They will give you a “strike price” and a timeframe when you can sell. You just wait until you are allowed to sell and then you get the paid the new price - the strike price per share. If the price is always below your strike price, nothing happens and you get zilch. You have to pay taxes on the earnings but that is just a percentage of what you make so there is no risk there. Stock options aren’t something you really turn down unless you are a new job candidate that has some negotiating room and wants a fraction of the stock options as a smaller amount of cash instead.

6

I don’t think that is generally the way it works. You don’t even have the shares until you sell them. The company holds on to everything and taken care of when you sell by signing some papers at your company. At least, that is the way it worked when I cashed mine in.

7

Yep, same here. You just usually fill out a company form that is submitted to the holding company and they in turn cut you a check.
Until then you really don’t have to do anything.

8

It can get a little more complicated, if you plan to hold the stock after exercising the option. There are two kinds of stock options: incentive stock options (ISOs) and non-qualified stock options (NQSOs). Yours are probably the latter, but you will want to read the information that accompanies the options.

The difference relates to the tax consequences if you exercise the options (buy them for 11.71/share), but do not immediately sell them. For NQSOs the gain is reportable as ordinary income, just like any other compensation. For ISOs, however, the gain may be reportable as capital gains (a lower rate) if the stock if kept for greater than one year after exercising it. If you keep it for less than a year, it is ordinary income. On the (severe) downside, ISOs are one of the primary triggers for alternative minimum tax.

So, in the end, if you plan on a same day sale, none of this really matters. So, read whatever information they give you and talk with some of the other employees so you can really get a feel for what you are getting.

As others have said, options are a good thing with no real downside.

9

I first started hearing about options in the late nineties when the Dot-Coms were running around. I guess that made me a little cynical. Options felt like a way to pay us without really paying us.

Thank you - I now have a vague clue as to what to do with these things.

Time to go back to lurking around GQ looking for the occasional Telecom/Swimming Pool/Theater question to pop up.

10

OK, I know nothing about stock options when they are given as incentive to employees, so I will shut my mouth now.

11

In the dot-bomb days there were several reports of people getting hurt big time by having to pay taxes on stocks they were given (usually in an IPO but sometimes as options) but couldn’t sell for a fixed period of time. Which was too late. So they had to pay taxes on the inflated value and amortize the losses over later years. For some, they were totally screwed.

So, be very careful about how you are going to cover the taxes.

Most employees now realize that options are an accounting scam for the benefit of the big shots. If you want to make employees happy, give them real money.

12

Unless you are sitting on an option for 1000 shares of Apple, in which case, more options please. Come on iPhone!

13

What the option means is that, assuming you meet all of the qualifications in the accompanying documents, you will be able to purchase 100 shares of the company at a price of $11.71 per share. You will then be able to sell those shares at the market price after you receive them (assuming you meet all of the securities law requirements, which should be minimal or non-existent to you if this is a large, public company).

Somewhere in the documents there should be a section about how and when you can exercise the options. Typically, you will not be able to exercise the options for at least a year, and you may not be able to exercise them after you have left the company. Also, because it says “vesting start date”, I suspect that the options will “vest” over a period of time, meaning you will only get part of the options unless you stay with the company for a specified time period.

(The documents should also specify whether they are qualified incentive stock options or non-qualified, which as noted above may have tax consequences).

Normally, to exercise the option, you will have to fill out a form (which is often attached to the option paperwork) and pay the company the exercise price for the number of shares of the option you want to exercise. If you wanted to (and were permitted to under the documents) exercise for all 100 shares, you would send in a check for $1,171.00 and the company would send you a certificate for 100 shares. You could then take that share certificate to a broker, who could sell it for you on the market (or you could hold that certificate and collect dividends if the company pays any). The company may also have a program where it will sell the stock for you at market price without having to separately go to a broker.

The documents may also have a provision for a cashless exercise, under which instead of paying the company $11.71 per share and getting the shares, which you then can sell in the market, the company will just pay you the difference between the $11.71 per share and the market price. In other words, if the stock is trading at $20.00, you would have a gain of $8.29 per share. Instead of giving them a check for $1,171.00 and getting back $2,000.00 after the sale, they will just give you the net difference of $8.29 per share.

Unfortunately, you may just have to read through the documents as best as you can. Usually there will be someone in human resources who can explain it to you and answer your questions. Good luck.

14

Or your company may set you up with a brokerage account when they give you the options. Mine set us with Morgan Stanley, and I recently sold one batch via their website. It was extremely easy and no paperwork was required.

I have another batch of options that is currently worthless and likely to remain so for some time.

15

That has been my experience along with the fact that taxes are taken out as if it were normal income makes it doubly painless.

16

This is GQ, right? Unless you have some evidence, speak for yourself.

17

I don’t think the company I worked for would have given me the amount I made with stock options. Over the 10 years I worked for them they gave me 100 to 300 options a year. When I cashed them in at the end I made $116,000 (taxes sucked away a huge chunk of that). For a guy making $40K a year at the time it was a big wad of cash that I used for paying off all my debt and putting down 25% on a new house.
(Granted I worked at the company during it’s boom where the stock split several times).

18

A good compromise scheme is run by my employer - a Sharesave scheme. You pay in say £50 a month (deducted from your salary at source) over x number of years. The capital earns interest and when it matures you can use it to buy shares at the option price or take the cash plus interest. If the share price is above the option price, happy days. If not, you take the cash plus interest. A true no-lose deal. :slight_smile: