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By John Lau CPA, CFP, RIA
Exercise now or later? Buy, sell, or hold? How do I avoid AMT tax? Should I understand all of the documents I signed?
These are the questions people constantly ask about their employee stock options. They are very good questions, and the answers are not always simple. Managing your stock options is very important.
Traditionally, employee stock options were granted to top management as a way to align the manager’s interests with the interests of the company. As co-owners of the company, the executives have a personal as well as professional interest in the company’s success.
Today, it is not uncommon for all employees of a company to be granted stock options. This is especially true in the technology sector, where reports of 20-something Internet millionaires make headlines with each successful IPO.
For many employees, their stock options can be the biggest financial asset they will ever own. This is especially true for workers who are hired by a successful company early, when the value of the stock is quite low and the number of shares granted is high. However, studies show that most employees do little or no financial planning regarding their stock options, especially after a successful IPO. They get used to seeing their stock go up, and simply assume that their stock will rise forever, or at least until they need cash for a major purchase.
“Set it and forget it” is great for rotisserie ovens, but not for employee stock options. There are multiple issues to consider including when to exercise, when to sell, how to determine actual value, how to avoid the dreaded “double tax,” and how to keep from running afoul of regulations imposed on equity compensation after the dot com crash of the early 2000s. In fact, the dot com crash should be a cautionary tale for today’s workers, as fortunes were lost precisely because people had huge concentrations of money in a single asset, and had not taken steps to protect themselves from a sudden and severe decline in value.
John Lau has been advising, teaching and writing about financial health for decades, and as a Silicon Valley financial advisor, has helped countless clients create plans to maximize the value of employee stock options. Contact John at: http://www.lfsfinance.com/.