Your options are generally secure, but not always. The agreements constitute contractual rights you have with your employer. Your company cannot unilaterally.
Table of contents
- Primary Sidebar
- Basic Overview of Stock Options
- What Should I Do With My Stock Options?
- Teardown: How Much Are Your Stock Options Really Worth?
With so much emphasis on IPOs , investors are sometimes surprised when publicly traded companies decide to go private. There are many reasons a company may choose to go private. Dry powder flowing into private equity funds only fuel the trend.
For employees of a public company going private via buyout, merger, or acquisition, it can be an uneasy time. For executives with stock options, restricted stock units, or other forms of equity compensation, you may be wondering what happens to your stock options when a public company goes private. Unfortunately, there are many possible outcomes for employees with stock options when a public company goes private:. Further, everything is subject to negotiation.
So if you have an agreement with your employer that differs from the terms of the standard equity plan, the general guidance may not apply. When in doubt, consider speaking with an employment lawyer near you. This happens when your exercise price also called strike price is greater than the fair market value of the stock.
If you have vested stock options that are in-the-money not underwater , the company will have to give you some consideration in exchange for your shares if they wish to cancel them. Typically, that consideration is the difference between your strike price and the approved share price for the deal.
Primary Sidebar
Alternatively, the soon-to-be private company could continue your stock options or substitute with shares of the successor. Unless the private company sets up a mechanism for employees to sell their shares, stock options could become very illiquid and potentially create tax headaches. Publicly traded companies may decide to accelerate the vesting of all unvested stock options.
In this situation, the company could pay cash in exchange for cancelling the options. Underwater stock options will likely receive no payout at all even if they vest when the deal closes. You can find this in your contract. When and how you should exercise your stock options will depend on a number of factors.
You would be better off buying on the market. But if the price is on the rise, you may want to wait on exercising your options. Once you exercise them, your money is sunk in those shares.
So why not wait until the market price is where you would sell? That said, if all indicators point to a climbing stock price and you can afford to hold your shares for at least a year, you may want to exercise your options now. Also, if your time period to exercise is about to expire, you may want to exercise your options to lock in your discounted price.
You will usually need to pay taxes when you exercise or sell stock options. What you pay will depend on what kind of options you have and how long you wait between exercising and selling. With NQSOs, the federal government taxes them as regular income. The company granting you the stock will report your income on your W The amount of income reported will depend on the bargain element also called the compensation element.
Basic Overview of Stock Options
When you decide to sell your shares, you will have to pay taxes based on how long you held them. If you exercise options and then sell the shares within one year of the exercise date, you will report the transaction as a short-term capital gain. This type of capital gain is subject to the regular federal income tax rates.
If you sell your shares after one year of exercise, the sale falls under the category of long-term capital gains. The taxes on long-term capital gains are lower than the regular rates, which means you could save money on taxes by holding your shares for at least one year. ISOs operate a bit differently. You do not pay taxes when you exercise ISOs, though the amount of the bargain element may trigger the alternative minimum tax AMT , which phases out income exemptions targeted for low- and middle-income taxpayers. When you sell shares from ISO options, you will need to pay taxes on that sale.
Well, since companies are generally issuing options at what they consider fair market value at the current time, the difference in these two numbers is zero. But if the company does well, the employees will exercise their options and see some gain from it. Whose slice of the pie are they eating out of? So there is some value — upside value with no downside — that these options provide. And so they issue more of them.
What Should I Do With My Stock Options?
To management at least, but not to shareholders. Your options are a right to buy shares in the company by paying an agreed upon price per share, called the strike price. The strike price is typically set by completing a A valuation with a third party assessor, who helps the company determine what the fair market value of the company is at the time the issue the new options packages. Along with this grant typically comes a vesting schedule.
It states how many shares vest, or become purchasable to you at that agreed upon price, per period of time working at the company.
Teardown: How Much Are Your Stock Options Really Worth?
If you have a grant of 40, shares issued with a vesting schedule of four years, then on the one year anniversary you would be able to purchase 10, of those shares at the strike price. By the second year, you would be able to purchase 20, shares. You can choose to actually exercise your options before a sale or other liquidity event. If you do, you have to pony up the cash. The benefit is that if you hold the stock for a year before a liquidity event, you get capital gains treatment rather than ordinary income treatment on your shares.
If you leave the company, you will often have a window to purchase your shares or forfeit them. That window can be as short as two or three months. Your other option is just to leave those options on the books. If you happen to be working at the company when the company is acquired, what will often happen is that the company will just wire you the difference between your options price and the sale price per share without you having to pony up the cash. If your company is publicly traded, the answer to this is easy: you can look up the going share price.
For those issued stock in a private company, you need a few pieces of information to determine what your shares are worth: a valuation of the entire company and the number of shares outstanding. To get to a valuation of the company, you are typically looking at a multiple of revenue or profits. The range on good software companies, for example, could be anywhere between 3x and 10x revenue. The multiple to affix depends on the growth rate of the company, its gross margin, its profit margin, and several other key factors.
Fortunately, there are a few ways to get a sense. Who has all the information we just talked about? The A valuation assessor. To create their assessment of the fair market value, an assessor will look at these factors and compare it to public companies with similar characteristics.
Second, they will also do their best to compare it to relevant acquisitions done in the market. Finally, they will look at any recent funding rounds done by the company and what price was paid by the new investors. They arrive at a number.