How to Benefit from Your Employee Stock Options Laura Tanner, Ph.D., CFP® SAS Financial Advisors, LLC.

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Presentation transcript:

How to Benefit from Your Employee Stock Options Laura Tanner, Ph.D., CFP® SAS Financial Advisors, LLC

LONG TERM INCENTIVE PLAN (LTI) Program for attracting, rewarding and retaining employees Used heavily by start-ups 2

EMPLOYEE STOCK OPTIONS Right to buy shares (i.e. exercise options) at a predetermined price upon vesting Options expire after a set period, usually 10 years, or within 90 days after leaving company 3

HOW OPTIONS WORK Grant (Exercise price or strike price, depends on valuation of company) Vest (According to company schedule) Exercise (Your Decision) Sale of stock (Your Decision) 4

VESTING Conditions for ownership of options or stock Can be tied to: Length of employment (graded or cliff schedule) or Performance *Know grant dates and conditions for vesting 5

Incentive stock options (ISO’s) vs nonqualified stock options (NQSO’s) ISO’s for employees only; NQSO’s can also be granted to contractors, consultants Different tax treatments - ISO’s can be more advantageous 6

EXAMPLE OF POTENTIAL GAIN You have $50,000 worth of stock at time of exercise, at a cost to you of $1000! Plan ahead for taxes owed at exercise. 7 # of optionsExercise Price/Option Fair Market Value (FMV) at Exercise Pre-Tax Gain/ Share 5000$0.20$10$9.80

ISO’s vs NQSO’s (TAX EVENTS) 8 EventISONQSO GrantNone VestNone ExerciseMay trigger AMT (FMV – exercise) Income, payroll taxes on (FMV – exercise) Sale (< 1 yr after exercise, 2 years from grant) Ordinary income Sale (>1 yr after exercise, 2 years from grant) Long term capital gains

Alternative Minimum Tax (for ISO’s) ISO’s: the spread between fair market value (FMV) and exercise price is an AMT adjustment Parallel calculations – income tax vs. AMT Must pay whichever calculation is higher

OVERALL STRATEGY Know details of your LTI plan, and stay on top of vesting schedule View your LTI plan in context of your total financial picture Develop plan and stick to it Get help from tax expert in making decisions on exercising options, selling stock 10