Exercising stock options is like playing a hand of cards: if your plays are strategic, you'll probably "know when to hold them and when to fold them." But, as always, rules and regulations apply to what you can do.
Get a sense of what you should, and should not, expect in the terms of your stock option grant. This survey of 300 companies looks at trends in vesting schedules, post-termination exercise rules, and other plan features.
It is tempting to exercise and sell your stock options when your company's stock price hits new highs or becomes worryingly volatile. However, this decision may not be in your best long-term financial interest. This article exames the psychological factors that can, along with economic motives, influence your stock option choices.
FAQ Table of Contents:
Basics & Rules
The full board of directors, the compensation committee, or an executive with expressly delegated authority...
In most cases, your exercise price for stock options is...
The specific steps vary among companies. You usually first need to make an irrevocable election to exercise...
The exercise and the sale are separate. Whether you sell the shares at the time you exercise stock options depends on various factors. At exercise, you can usually...
Perhaps. Your stock plan or grant agreement may provide that the company can refuse to allow exercises if...
Your company has full discretion on which methods to include in the plan document or grant agreement. Surveys show that...
You cannot exercise your options unless they are vested. The one exception...
No hard and fast rule exists for determining the fair market value for exercise transactions, as long as a company is...
No; but there is one exception...
No. Until you exercise a stock option, you do not have the rights of a...
Usually not for public companies. One exception might be...
Plans usually do not restrict...
You need to check your stock plan's provisions and the procedures/practices followed by your company or any outside stock plan administration firm. Usually...
There's no requirement for which vested options you must exercise first. The decision of which options to exercise first is part of your...
If your option was granted with a graded vesting schedule, you are allowed to exercise the vested portion of the option grant, but most commonly you forfeit the remainder...
This depends on how the grant is structured. A federal law...
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Exercise Methods
Many companies do this because their original plans consider nothing but cash exercises. For example...
Check your company's stock plan for the allowed methods and procedures. The most common methods involve...
Review all of your stock plan documents to become familiar with the permitted manners of exercise, and find out...
Yes, if you so desire...
These depend on various factors. You need to pay the following when you exercise stock options...
The specific procedures vary (check the details of your stock plan documents). Generally you are required to complete the following steps...
This is the most common type of exercise. When it is permitted by your stock plan, a cashless exercise is an exercise-and-sell transaction in which you do not...
For the transaction to occur, you need to follow the specific procedures detailed by your stock grant agreement and any brokerage firm or transfer agent your company requires you to use. While it is hard to generalize, the process often works as follows...
The IRS has set deposit rules companies must follow. With a cashless exercise, the broker essentially sells the shares that underlie the options at the time of exercise. The broker sends the company cash from the sale of your shares that is equal to the amount required for tax...
The law seems to leave this matter open. Generally, it prohibits public companies from directly or indirectly making...
A sell-to-cover exercise is a type of cashless exercise in which the broker sells just enough of the shares from your exercise to cover all the costs. You need to be careful about...
A "stock swap" or "stock for stock" exercise is a stock option exercise in which the exercise price is paid with shares of company stock you own...
Yes, you can use ISO stock to exercise NQSOs without disqualifying it, as the...
Not necessarily. Stock option plans that allow stock swaps may permit you to exercise options with already owned shares through a procedure known as...
Yes. If actual shares are delivered, they must be in transferable form when tendered...
Yes, if your company allows it. When you use your ESPP shares as currency for exercising options, you receive both replacement shares equal to the number you exchanged and the profit shares...
Not until the restricted stock vests. Then the stock is...
Your stock plan and your company's accountants may require this before you can tender shares to cover the exercise price. If shares obtained from the exercise of a stock option are used before...
Some companies use "net options" or "net share settlement" to denote exercises in which you return or surrender to the company...
If your plan or grant agreement permits, you may ask the company to lend you the amount necessary to exercise the stock option...
Important terms concern the interest rate and the type of security for the loan. For tax reasons, a loan from an employer must bear interest at the applicable federal rate ("AFR"), and it must allow the company to sue you if you do not repay the loan...
Transfer agents are record keepers hired by public companies to assist in the...
Not if you used cash, a company loan, or shares of company stock that you already own. If you engage in a "sell-to-cover" exercise...
You can place four types of sell orders, depending on your brokerage firm and company rules...
Brokers are allowed by Regulation T of the Federal Reserve to lend up to 50% of a stock's market price on the day of the loan...
A margin loan allows you to borrow money from a stockbroker by using negotiable securities as collateral. Optionholders can use the borrowing power in stock they will receive to pay for an option exercise when the market price is...
In a quest to start your one-year capital gains holding period and minimize the amount of ordinary income associated with an award or grant, you may...
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Taxes
The tax treatment depends on the type of stock option. This website has detailed content about tax withholding and reporting in the
Tax Center, which includes
annotated examples.
Only in very limited circumstances, and your company needs to allow the rescission. The company would...
All exercises with an exercise date in 2013, and all restricted stock with a vesting date in 2013, will be included in 2013 taxes and on your W-2 for 2013, and will count...
Perhaps, depending on the structure of the plan. In general, the IRS wants to know about the foreign assets of US taxpayers to be sure taxes are paid on any earnings. There are two major reporting requirements for US taxpayers who have offshore holdings that qualify for disclosure...
The holding period to determine whether a capital gain is long-term or short-term starts on the...
The holding period to determine whether a dividend is "qualified" and taxed at the lower 15% rate starts on the date after the option is exercised and the stock is held...
You will need to gather certain information to complete your tax return. The broker will send you IRS Form 1099-B for the proceeds...
You should almost always receive Form 1099-B. The only exception occurs if certain requirements under IRS Rev. Proc. 2002-50 are met. This revenue procedure allows...
Wishful thinking! Just as you are not taxed on the value of the options at grant, you may not write off any expired unexercised options, whether underwater or in the money...
Maybe not. You are probably thinking that you can borrow money, such as with a margin loan, deduct this as an investment interest deduction, and net it against investment income...
Let's begin with the "accounting reasons." Since January 1, 2006, every US company has had to recognize unvested stock options as...
The spread at exercise is what matters for the tax calculation...
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Restrictions
The popular media sometimes confuse the term "blackout" with "lockdown." For stock plans, these terms apply to different...
Most companies do not prohibit exercises of stock options during blackout periods (but see an exception). However, you need to be careful about...
As the IRS confirmed in Revenue Ruling 2005-48, the tax-measurement date...
If you exercise stock options when you know secret stock-price-moving information about your company, the exercise itself is not a violation, according to most experts. However, selling the stock at exercise, as in a cashless exercise/same-day sale, when you know confidential information about the company would almost certainly be considered insider trading. Examples...
The period for option exercise depends on both your employer's plan design and the reason for your termination. If the options are not exercised by the specified date, they are forfeited. Court cases and survey data show that...
Retirement is a termination of employment under your stock option plan. Under almost all stock option plans, after you terminate employment the plan specifies...
Often, stock option plan documents provide a longer exercise period for death than for other terminations of employment. For example...
Generally, stock options are exercisable only when they vest. However, some pre-IPO companies grant options that...
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Tax errors can be costly! Don't draw unwanted attention from the IRS. Our Tax Center explains and illustrates the tax rules for sales of company stock, W-2s, withholding, estimated taxes, AMT, and more.
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Stock Option Fundamentals (Part 6): Exercise Methods 
