Employee stock options and grants of company stock can be very confusing for recipients regardless of the lengths companies go to provide education on these programs.  Consequently, misconceptions materialize and are held as facts that are then propagated by water cooler discussions.  Here are the major misconceptions concerning equity compensations and the associated truths:

Myth 1: Getting assistance or creating a strategy is unnecessary because the value of company stock and options is simply a function of stock price and luck!
Truth 1: Careful planning and professional guidance facilitates profitable decisions and avoids costly mistakes.  Establishing a strategy for exercising and selling options and for diversifying held share positions has proven over time to maximize the value of ones grants.

Myth 2: Stock options should be exercised just prior to expiration, when money is needed or when a target price is met!
Truth 2: Exercise and sell decisions should consider the following three factors: 1) the remaining time value or leverage in the options, 2) financial goals not just cash flow requirements and 3) ones level of concentration in company stock and options.

Myth 3: Taxation can be avoided!
Truth 3: Taxes on equity compensation are unavoidable but they can be managed to reduce the liability.  Equity compensation taxation can be complicated especially with incentive stock options (ISOs) so it is alway a good practice to consult a tax specialist before taking action.

Myth 4: Managing ones stock options is unnecessary, if you are now receiving restricted share grants!
Truth 4: Regardless of whether you are now receiving share grants, if you have any outstanding options they need to be monitored.  No decisions are needed for restricted or performance shares, but options have to be exercised prior to expiration which requires vigilance, updated information and a strategy.

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  1. Taffy: In the case of non qualified employee stock options, which are the great majority of ESOs granted, there is an immediate ordinary tax payable upon exercise. Also, upon exercise, there is an immediate forfeiture of the remaining “time Value” back to the company.

    These penalties of early taxes and forfeiture of “time value” give holders of vested ESOs reasons to avoid early exercise. Do you have any ideas of how to efficiently reduce risk of holding ESOs prior to exercise?

    John Olagues

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