States Important Facts about Managing Employee Stock Options

1. .

2. Important Facts About Managing Your Employee Stock Options

3. 1. You will get the most from your employee stock options by holding them to near expiration. Executives like Steve Jobs of Apple, James Dimon of J.P. Morgan, John Chambers of Cisco, Larry Ellison of Oracle and countless others hold their ESOs until near expiration. 2. Holding the ESOs until near expiration raises the costs of the options to the company. Companies would rather you make premature exercises of the options. The companies receive three benefits from early exercises.They receive early tax credits, they recapture the remaining "time premium" and they get an early cash flow from the exercise of the options. Premature exercises also allow companies to report lower "fair value" calculations of costs for GAAP reporting.

4. 3. Selling exchange traded calls and buying puts is the only efficient way to reduce the risks of holding ESOs to near expiration. Hedging requires no forfeiture of "time premium" back to the company, and no early tax to the grantee. Hedging extends the alignment of employee/ shareholders interests. 4. Hedging is allowed by most companies. Although the Stock Plan Documents and Options Grant Agreements do prohibit transferring or pledging the ESOs, there is generally no prohibition against hedging. However, promoters of the interests of the company against the interests of the employees claim that hedging is prohibited. Those promoters are risking law suits by grantees who wish to reduce risk efficiently by hedging and are advised that hedging is prohibited and refrain from reducing risk. In fact some attorneys claim that if advisers fail to advise on the most efficient strategies, they are liable to be sued.

5. 5. Financial Advisers and Wealth Managers who advise against hedging ESOs either do not understand the merits of hedging with exchange traded calls and puts or choose to align themselves with the interests of the companies against the interests of their employee/clients. 6. Although there are some complex tax rules that may apply to selling calls and buying puts while holding stock or ESOs, the rules can be navigated to make hedging strategies tax-friendly. 7. Although there are SEC rules and margin requirements to consider when hedging, none of those rules or requirement substantially restrain hedging. 8. If the Stock Plan does not prohibit hedging , the grantee can hedge and needs no approval from anyone.