stock options portland state university mba program
TRANSCRIPT
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Stock Options
Portland State University
MBA Program
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Stock Options
• What are they?
• How do they work?
• What are some tax issues?
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Disclaimer (of course)
• This presentation is general and not intended to give legal advice to specific employees
• Employees will have their own unique circumstances and should consider consulting with their own tax or accounting advisors
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What Is a Stock Option?
• The right to buy the company’s stock at today’s price
• Not stock
• Later, when the stock is more valuable, you can exercise the option to purchase the stock at a discount
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How Does the Stock Option Work?
• Vesting
• Exercise
• Transfers
• Holding Period
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Vesting
• There is a vesting schedule attached to each option agreement
• The vesting schedule describes the earliest date that an option can be exercised
• Vesting doesn’t issue shares – just allows the purchase of shares
• Must remain an employee through the dates described on the vesting schedule to earn the amounts vested
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Vesting
• Example:– After one year, 28% of the options become
vested– After each following month, 2% of the
options become vested, for 36 months– After four years, all options vested
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Vesting
• Acceleration– Some unvested shares may become vested
in some circumstances• Death or disability
• Certain change of control transactions
• Potentially gives employee the right to buy more shares than described in standard vesting schedule
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Vesting
• Summary:– Specific acceleration rights that might apply
in the event of a termination or acquisition
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Exercise
• Exercise by paying the purchase price for the shares that you want to purchase
• Can exercise all at once, or several times• Not a shareholder until the option is exercised• Consult with the company to discuss ways to
pay for the shares
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Exercise
• Timing:– The option expires 10 years after the grant
date– The option expires 90 days after termination
of employment– After the option expires, the right to
purchase the stock is lost
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Exercise
• An option is an option not a mandatory
• Exercising options is an investment decision
• After you exercise, you are a shareholder
• Receive shareholder notices
• Share in the upside (or downside) along with the other shareholders
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Exercise
• Summary:– Exercising an option is investing in the
company– Consult with the company on how to make
that investment– Be careful about the expiration of the option
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Transfers
• Options can’t be transferred– The agreement is between you personally and the
company
• What can you do if you need to transfer an option?– Exercise the option and transfer the shares instead?
– Enter into an agreement assigning control of the option to a third party?
– Must consult with the company to find a solution
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Holding Period
• If you have an Incentive Stock Option:– After you exercise the option, you must hold
the shares for one year after exercise, and– After you exercise the option, you cannot
sell the shares until two years after the date of the option grant
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Holding Period
• If you sell early:– Tax consequences, discussed below
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Tax Issues
• Date the company gives you the option
• Date you exercise the option
• Date you sell the stock
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Tax Issues
• Date the company gives you the option– Incentive Stock Option (ISO): No income to
employee– Nonqualified Stock Option (NQ): No
income to employee … usually
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Tax Issues
• Date you exercise the option– ISO: No income … usually
– NQ: Income = (the value of the stock on the exercise date) – (the exercise price of the option)
– Therefore, if you exercise a NQ option, you should be prepared to pay taxes
– Consult with a tax advisor before exercising option
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Tax Issues
• Date you sell the stock– ISO: Income = (sales price for the stock) – (the exercise price
you paid)• Because of the holding period, this should be taxed as capital
gains for the shareholder
– NQ: Income = (sales price for the stock) – (the value of the stock on the exercise date)
• May be capital gains or ordinary income depending on circumstances
– When you sell stock, you should be prepared to pay taxes– Consult with a tax advisor when selling stock
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Tax Issues
• Early disposition of ISO shares:– Income = (the value of the stock on the exercise
date) – (the exercise price of the option)• This will be treated as compensation (ordinary) income
– Plus: Income = (sales price for the stock) – (the value of the stock on the exercise date)
• May be capital gains or ordinary income depending on circumstances
– Again: Consult with a tax advisor when selling stock
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Tax Issues
• Summary:– For ISOs, usually no income is recognized
until you sell the stock– Income would be the gain on the stock,
likely at capital gains tax rates
– Consult with tax advisor
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Good News
• An option will be valuable to an employee if the value of the company’s stock goes up
• Employees have a direct personal incentive to increase the value of the company’s stock
• Employees get to share directly in the value they help create for everyone
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• James N. McDermottAter Wynne LLP
222 SW Columbia St., Suite 1800
Portland, OR 97201
(503) 226-1191
www.aterwynne.com