Is
there a planning difference between "stock options" and "employee
stock options?"
Conceptually,
stock options that are purchased on the open market and employee
stock options that are granted by a company as part of an incentive
package are similar. However, the planning implications can be quite
different because of the audiences involved.
Very
often, the employee who has been granted an ISO or a NQSO will not
be aware of the value of the option, the tax implications, or the
risk that comes from a lack of diversification. They are also likely
to overrate the upside potential of their own company's stock, or
even to feel disloyal if they elect to exercise out of their own
company's stock.
This
group represents a planning opportunity for the financial professional
who can provide objective advice.
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How
many people have employee stock options? How
many of these already are receiving planning advice?
Estimates
from the National Center for Employee Ownership place the number
of employee stock option owners at 7-10 million. Less than 30% of
these receive active management advice for their options.
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What
is the most popular strategy for exercising stock option grants?
Unfortunately,
the most popular "strategy" seems to be "take the money and buy
a boat." Many option-holders view their grants as found money, and
use it for a discretionary purchase rather than a long-term investment.
Before
addressing whether ALAP, ASAP, or some other strategy will generate
the most immediate cash, an advisor is well advised to understand
their clients' current financial situation, long-term plans (if
any), and their sense of the role their options play in their total
net worth. Don't let the tail wag the dog.
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Why
bother to plan for options that are "under water?"
Even
options that have no current value can have potential future value.
View an excellent discussion,
including a Black-Scholes assessment.
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Can
non-employees be granted Incentive Stock Options (ISOs)?
In
a word, "no". The definition of an ISO is an option granted to an
employee. However, both employees and non-employees may be granted
Non-qualified Stock Options (NQSOs.) NQSOs have slightly different
rules and regulations than ISOs.
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What's
a restricted stock option plan?
A
restricted plan is any qualified option plan that doesn't fit the
definition of either an ISO or an NQSO. They could be an infinite
variety of restricted plans.
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What
is cliff vesting?
Vesting
refers to the period of time that must elapse before the option
holder may exercise. There are a number of popular methods in use:
- Cliff
Vesting: An all-or-none
vesting option where the employee's options become vested on one
date. Until that date, the options are considered 0% vested.
- Performance
Vesting:
One that is tied to predetermined goals set by the company, typically
related to certain earnings or revenue targets.
- Step
Vesting: When the percentage of options exercisable each year
increases.
- Straight
Vesting: When the percentage of options exercisable each year
is the same.
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