What Should I Do With My Company Stock Options?
Company stock options sometimes provide a large payoff, however they can also be costly to exercise and end up costing you large sums of money with little return. There are also complex tax consequences to consider when exercising and selling stock options. Below are a few best practices for maximizing the value and limiting the risks of exercising and selling your company stock options.
Understand the Tax Implications
Incentive stock options (ISOs) have different tax characteristics than non qualified stock options (NSOs). If the stock does well and you time the exercise right then you may be able to pay much lower taxes with ISOs than you would with NSOs. But be aware that you may be hit with AMT tax when you exercise your ISOs and this will increase the amount of taxes paid. Make sure you know how much you owe and that you pay your quarterly estimated taxes to avoid tax penalties and tax surprises at the end of the year.
Understand the Risks
Be aware that exercising any type of stock options early can be very risky. Your complete financial situation, goals and risk tolerance must be considered when deciding when to exercise and when to sell. The stock price can drop significantly after you exercise, which means you pay taxes and exercise costs at a price much higher price than you ultimately sell the stock at.
Keep Track of Vesting Schedules
Make sure to keep track of the vesting schedule for your options, so you know when you are able to exercise them and when they expire. Most stock options expire ten years after they are received, however the number of years varies from company to company.
Stay Up-To-Date on Your Company's Financial Health
Closely monitor your company's financial health, as this will impact the value of your options. Stay informed about any major developments or changes in the company that may affect the value of your options. Keep in mind that your CEO and management team most likely have very inflated visions of your company’s stock performance. Keep this in mind as you evaluate the company’s true value.
Exercise and Sell Your Options Very Carefully
Consider the timing of when to exercise, and when to sell, your stock options, as this can significantly impact your tax liability. For example, if you have ISOs then there may be tremendous tax benefits available if you exercise at least one year prior to selling them. A mistake here could easily cost you hundreds of thousands, or even millions, of dollars in taxes.
Diversify Your Portfolio
It's important not to have most of your eggs in one basket. If your stock options and company stock are a large percentage of your net worth then you need to consider investing in other assets such as other stocks, bonds, real estate, and ETFs to de-risk your portfolio. This is imperative if you have dependents or anyone else that relies on you.
Seek Professional Advice
Consider seeking advice from a financial advisor or investment professional who specializes in company equity planning. They can help you understand the risks and develop a plan for managing your options and other assets.