The Basics of Equity Compensation

MANAGING STOCK OPTIONS

Effectively managing stock options may be an important and complicated financial challenge. There are several things to consider to successfully manage stock options which include the following:

• Goals
• Financial counsel
• Planning ahead
• Stock option worth
• Good timing
• Consequences
• Vesting
• Expiration
• Taxes

Let's take an in-depth look at what it takes to manage stock options.

Goals

Planning always begins with goal setting.

Goals will depend upon the option owner’s lifestyle. How will the profits be used when the stock is sold?

Having the money and using it may seem a long way off when options are granted but thinking about financial goals early will affect how a person budgets their entire monetary portfolio (stock, savings accounts, etc.).

Financial Counsel

Stock options are complex and require technical knowledge about how they are optimized. Unfortunately, not all lawyers, accountants, and brokers know stock option issues inside and out. It is important to get reliable help.

Here are a couple of questions that should be asked when interviewing a financial advisor:

• How much experience do you have with employee stock options?
• Can you provide references from other clients that have options?

Plan Ahead

How will the stock options be managed?

These things should be kept in mind when creating a plan:

• Stock option terms
• Tax consequences
• Lost gains consequences

When exercising options, it is important to remember there are tax consequences. As such, it may be beneficial to alternate the exercises and sales and spread them out over several years to ease the tax burden.

On the other hand, sometimes it's beneficial to hold all options until the end of the term (usually 5, 7, or 10 years). Whatever the case, it is critical to plan ahead. When waiting until the last minute to exercise and sell (or not), the tax may be more than it needs to be, or the opportunity to make financial gains when stocks are on the rise may be missed.