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What To Do When Your Stock Options Vest

What To Do When Your Stock Options Vest

| October 30, 2019
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One of the major perks of being an employee in a management position is that it’s common for your compensation to include much more than just your salary. In addition to receiving the standard healthcare and other benefits that are a part of all employee packages, you’re a part of the elite group that also gets equity compensation, such as stock options and restricted stock units.

Typically your company begins to include equity in your compensation package when they think you’ve reached a level of influence where what you do could actually impact the value of their stock. They want to tie your incentives to the stock price in order to motivate you to make decisions that will benefit shareholders.

You’ve made it to management. You’ve been granted stock options. You’ve stayed with the company long enough for them to vest. Now what do you do? 

What To Do With Vested Stock Options

Once your options vest, there are really only three routes you can take. Option #1 is to basically do nothing and just hang onto them. As this requires no effort on your part, this is the simplest option. However, you also receive no immediate financial reward.

Option #2 is for you to exercise the options and hold the stock. This is where you go ahead and make use of your options to buy stock at the discounted exercise price. Once you’ve purchased the stock, you keep it as part of your portfolio. This will increase your portfolio value, but you will receive no immediate cash reward.

Option #3 is to exercise the options and then immediately sell the stock, which allows you to quickly convert your options to cash for use in other areas of your life. 

What To Consider When Making Your Decision

So, of these three different possible routes to take once your options vest, which is best? Since the best choice for you will depend on a variety of factors, here are some things to take into consideration when making your decision.

Asset Allocation

Do you want to own company stock? If the answer is no, then Option #2 is not the one for you. If you think your company’s stock will increase in value, then you may want to go with Option #1 and wait to see how much of a gain you can realize. There is a risk to waiting, though, as the stock price could decrease. If you just want to take the money and run, you’ll probably opt for Option #3.

If you do want to own company stock, then Option #1 or Option #2 are for you. Your tax situation and the type of stock options they are will influence which of those two choices are best.

When contemplating whether or not you want to own company stock, you should consider diversification. Owning company stock does not only impact the diversification of your portfolio, but also your net worth and income-earning potential. If your company fails, it’s not just the stock that you may lose out on, but you could also lose your job and source of income.

Cash Or Cashless Exercise?

With stock options, you’re not actually given the stock. Rather, you’re given the right to purchase stock at a specified price (hopefully lower than market value at the time of vesting). Since it is a purchase, you need funds to make the purchase. If you have enough cash, you can pay for the stock and/or tax withholding with it in what is called a cash exercise.

Even if you don’t have cash, you can still exercise your options in what is called a cashless exercise. In a cashless exercise, a portion of the stock shares are sold in order to cover the cost of the purchase and/or taxes. You don’t need any cash up front, but you end up with fewer shares in the end.

Whether you do a cash or cashless exercise will first depend on whether or not you have the cash available to you. If you don’t, you have no choice but to go with a cashless exercise. Even if you do have the cash, you may choose to reserve it for other purposes and still do a cashless exercise.

Taxes

Stock options are compensation and are therefore taxed. The kind of options they are, whether Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NSOs), will determine how they are taxed. There’s a good chance that your stock options are also subject to the Alternative Minimum Tax (AMT). 

Since the tax impacts of stock options can be significant, it is important to work with a financial professional with experience in this area when deciding when and how to exercise your stock options. 

How We Can Help

We understand that as a busy professional, you don’t have the time and energy to become an expert in the intricacies of employee stock options and their tax implications. But our team at Match Point Financial specializes in helping professionals make financial decisions and execute them. So let us help you too!

If you have stock options that you need help figuring out or other financial questions that you simply don’t have the time to answer on your own, don’t hesitate to reach out for help. To contact me, call 352-207-8014 or schedule a complimentary phone call using our online calendar.

About Chris

Chris Reed is a financial advisor and the founder of Match Point Financial. Since 2002, he has been helping people make informed choices with their money and pursue their financial goals and objectives. He started his career with MetLife and has continued seeking to provide his clients with the best possible service through A.G. Edwards, UBS, and finally through partnering with Cetera Advisors LLC and forming his own independent firm in 2010. Learn more about Chris by connecting with him on LinkedIn or register for his recent webinar “Are Your Old 401(k)s Collecting Dust and Losing You Money?” here.

Financial Advisor: Securities and advisory services offered through Cetera Advisors LLC, member FINRA/ SIPC, a broker/dealer and a Registered Investment Advisor. Cetera is under separate ownership from any other named entity.

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