1. Stock Options 101
Anecdotes from a Survivor

2. Today’s Goal
Maximize stock option worth. Minimize tax.

3. There will be questions, so ask them as we go.

4. Definitions

5. Stock Options

6. Stock

7. Stock

8. Stock
• Equity, or ownership, in a company
• In the form of shares
• A share has an associated price or value

9. Share Price
Public companies: stock exchange list price
Private companies: fair market value (FMV)

10. Fair Market Value
(FMV)
• FMV = (company valuation) / (# of shares)
• Valuation is loosely based on revenue
• E.g., Instagram valued at $20m+
• Total revenue: $0
• Usually is updated every year and financing
event

11. Share Price
Public companies: stock exchange list price
Private companies: fair market value (FMV)

12. Stock Options

13. Stock Options

14. Stock Options
• Option to buy a share at a discount
• Discounted price is “strike price”
• In most cases can’t be sold, only exercised
• Come in bundles called “grants”

15. Stock Option Grants
• Variables:
• Type of option
• Strike price
• Current FMV
• Quantity
• Vesting schedule

16. Option Types
• Incentive Stock Options (ISO)
• Non-qualified Options (NQO)
• Non-statutory Stock Options (NSSO)
• I’ve omitted other less common types
• Difference is tax implications

17. Vesting Schedule
• Rate at which options “vest”
• An unvested option cannot be exercised
• A vested option can be exercised

18. Typical Vesting Schedule
• Within first year no options vest
• At one year anniversary, 25% vest
• Over the next three years, 1/48 of total
amount vests each month
• All options vested after four years
• The above applies to each grant

19. Stock Option Grants
• Variables:
• Type of option
• Strike price
• Current FMV
• Quantity
• Vesting schedule

20. Typical Timeline
1. Option granted to you
2. Option vested
3. Exercise option, convert to a share
4. Sell share, convert to $
Bold stages can have tax implications

21. Exercising Options
• You pay the strike price to the company
• Payment = (# options exercised) * (strike price)
• Potential to be taxed (more on this later)

22. Selling Shares
Public companies:
restrictions on quantity and timing may apply
Private companies:
only able to sell if company allows for a secondary market
(more later)
Guaranteed to pay taxes

23. Secondary Market
• Is created when:
• An employee wants to sell stock
• A buyer is interested in buying stock
• Company might not allow a secondary
market
• Company can have “rights of first refusal”

24. Taxes
And you were already confused ...

25. Exercising
Non-qualified and Non-statutory Options:
Guaranteed to pay taxes according to difference
between FMV and strike price
Incentive Stock Options
Will only pay taxes if difference between FMV and
strike price put you into Alternative Minimum Tax
(AMT) range

26. What’s AMT?
• Government’s way of getting more taxes
out of rich people
• Consult a tax specialist to understand if/
when you’ll get AMT

27. How much will I pay?
Talk to a tax specialist
Depends on income and other things

28. Total Value of Exercise
Amount paid in taxes is according to difference paid to
exercise and total value:
(# of options) * (FMV - strike price)

29. Variables
• You can control # of options exercised
• You cannot control strike price and FMV
• FMV usually updated annual and during
financing events

30. Selling Shares
• Two possible tax outcomes:
• Long-term capital gains (ideal)
• Short-term capital gains

31. Long-term Capital
Gains
• Currently 15%, supposedly going to 20% in
2013
• Only applicable if:
• Stock option held for one year
• Share held for one year
• Share sold after two years option grant

32. Short-term Capital
Gains
• Taxed as if the gain is income
• Only applicable if:
• Stock option held less than one year
• Share held less than one year
• Share sold before two years since grant

33. Situations

34. Situation 1
1. Exercise option
1. If ISO, slip under AMT
2. If NQO/NSSO, bite the bullet and pay
small tax
3. After one year since grant
2. Sell share
1. After one year since exercise
Avoid/minimize exercise tax, pay long-term capital gains

35. Situation 2
1. Exercise option
2. Immediately sell share if
share value >>> exercise value
Pay exercise tax and short-term capital gain, but that’s OK
because you’re rich

36. Situation 3
1. Exercise option
2. Company goes bankrupt
Paid to exercise options, and now shares are worth $0

37. Situation 4
1. Exercise option
1. If ISO pay AMT
2. If NQO/NSSO pay tax
2. Company goes bankrupt
Paid to exercise options AND exercise tax, now shares are
worth $0. Government doesn’t refund you

38. Situation 5
1. Exercise option
1. If ISO pay AMT
2. If NQO/NSSO pay tax
2. Sell share
1. One year later to get long-term capital
gains
Pay taxes on exercise but shares haven’t been sold yet, and
you still owe taxes, potentially a lot

39. Situation 6
1. Wait to exercise option
2. Decide you want to leave the company
3. Have (typically) 90 days to exercise
4. Exercise before options expire
5. Can’t sell share because no secondary
market
Pay taxes on exercise but shares haven’t been sold yet, and
you still owe taxes, potentially a lot

40. Situation 7
1. Wait to exercise option
2. Decide you want to leave the company
3. Have (typically) 90 days to exercise
4. Don’t exercise
As if you were never granted stock options

41. What should you do?

42. Think about options
when:
1. You plan to leave the company
2. Company is close to an IPO or acquisition
3. Options are vested
4. Company valuation might change

43. Consult a tax specialist
when:
• You’re considering exercising options
• You’re considering selling shares

44. Good Read
Consider your Options by Kaye A. Thomas

45. Conclusions
• Way too complicated
• Let this sit for a few days, read the deck
over again
• Ask me any questions you might have