In episode 22 of the Equity Compensation Guidebook, we are talking about exercise. I'm sure you're tired of hearing about exercising in the new year, but the exercise we're going to cover is that of stock options. While it may not strengthen your health, it certainly may strengthen your wealth! There is a simple way to exercise your options and a way that requires a little more effort. However, if you want to optimize things and keep your tax bill lower you may want to listen on.
You will want to hear this episode if you are interested in...
First things first… NSO’s...TAKE THEM! [1:04]
Don’t miss those deadlines especially when you’re in the money! [2:40]
Waiting to exercise [4:08]
Exercising options as soon as possible and holding [4:44]
The best way to figure out your best course of action [5:55]
This week’s FLASHBACK [7:38]
NSOs - TAKE the options
When I talk about stock options I am referring to non-qualified stock options, also known as NSOs. There are also ISO's, also known as incentive stock options out there, but we won’t cover those. If you're wondering if you have NSOs or ISOs the odds are you’ve got the former since 95% of stock options are non-qualified, but you will obviously want to check with your benefits people to confirm.
If your employer offers you stock options— TAKE THEM— take the options! You'll be shocked at how often I hear stories of someone turning down stock options. There is no risk for you to accept them. When you receive stock options, there are no tax consequences. The only time there is a tax consequence is when you decide to exercise your options but that is a decision you make when the time comes.
The dilemma to exercising your options
If your stock options are in the money, meaning they have increased in value, odds are good that you should exercise them. If they have dropped in value since the award, meaning you are not in the money, there is nothing to do. Since you exercise nothing there is no tax bill. However, if you or your advisors let the exercise date slip past you, then you will lose your chance to exercise those in the money options. Any profit you could’ve had will be gone. Don’t laugh, it happens, 11% of the time in fact.
Once you are fully vested and have the power to exercise your options you’ll want to look at the best way for you to proceed. Should you exercise them right away? Perhaps there is a reason for you to hold them for a while? Join me for episode 22 of the Equity Compensation Guidebook for tips on why, when, and what you should do with your options.
This week’s FLASHBACK: My first car
Some people have big love for their first vehicle. I didn’t love it but I was super appreciative to have had one when most of my friends didn't. My older brother and I shared it. It was a used 4-door, red, Chevy Cavalier with a sunroof. It was manual and it had NO power. Which was perfect for a couple of high school knuckleheads like us. At least we never got speeding tickets like some friends we knew with sporty cars.
Like most first cars, mine had a couple of unique quirks. The brakes were terrible. I don't know if it was just the car or if it was the model, but there was no such thing as slamming on the brakes. Even after putting on brand new ones. I recall having to pull the emergency brake on more than one occasion to help me stop, when pushing the brake pedal to the floor was just NOT going to cut it. My favorite feature was that you could take the key out of the ignition when it was running, lock the door, and let the car warm up. This was perfect on winter nights. Maybe it was an early version of the remote start but without the remote part.
Overall, it ended up being a solid car. It gave me freedom and it wasn't like some of my friends who had to borrow their mom's minivans or station wagons. That car lasted for YEARS too! It made it through 3 years of high school, 4 years of undergrad, and almost 2 years of grad school. Not too shabby for a used Cavalier in the eighties and into the nineties!
I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.