Equity Comp Financial Planning In Pandemic Times: myStockOptions Newsletter No. 80 (June 2020)

Underwater stock options: what to do
Restricted stock/RSUs and performance shares: built-in value in down markets
Articles on financial planning for volatility, down markets, economic uncertainty, and job loss
Webinar: Financial Planning For Stock Compensation During The Pandemic
Reminder: Tax Day 2020 is July 15 for Form 1040 and estimated taxes
myStockOptions Learning Center: Convenient CE credits online

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SPONSORS OF THIS ISSUE

• AdvisorFind Directory from myStockOptions.com: Search this resource for financial, tax, and legal advisors with experience in stock compensation (see the ad below)

• Think Twice training videos for insider-trading prevention: Educate, entertain, and scare your employees and executives into compliance (see the ad below)

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myStockOptions.com Celebrates 20 Years!

We launched the website on June 22, 2000, in a very different world to that of today. Thank you for all of your support. Over the past two decades we have become the leading independent educational resource on equity comp, with award-winning content and tools focused on stock options, restricted stock/RSUs, and ESPPs. We especially thank all of our site members, licensing clients, and advertisers. You have supported our growth through many stock market and economic cycles.

In This Newsletter Issue

The Covid-19 pandemic has affected everyone, including employees with equity compensation.

• You may need to sell company stock for cash to meet living expenses.
• Your company's stock price has probably steeply declined and rebounded, going through volatility that makes you wonder about your equity comp and financial planning.
• You may have lost your job or been furloughed, or you may have changed jobs.

The newsletter below presents recent articles from the myStockOptions editorial team on these and other timely topics.

Keep Up With Stock Comp Developments

Don't want to wait for our quarterly newsletter updates? The myStockOptions.com Blog is a great way to stay informed about new developments in equity compensation. You can also follow us on Twitter and Facebook. In addition, I now have a blog at Forbes.com.

—Bruce Brumberg (Editor-in-Chief)

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What are underwater stock options? Why shouldn't I exercise them?

Underwater stock options have an exercise price which is greater than the market price of the underlying stock. For example, you may have options with an exercise price of $10 a share while the stock is trading at $8 a share.

For obvious reasons, you do not want to exercise underwater stock options, as you would being paying more for the shares than their current market price, and the exercise itself would not generate any tax loss that you could apply against other income.

Only in extremely rare situations might you purchase stock at a price that is greater than its fair market value.

Example: Your company is privately held, so you can't buy its stock in the open market, but you believe the purchase/exercise price will turn out to be much lower than the stock price will eventually be if the company is acquired or goes public. That is a big risk.

See a related FAQ on the various approaches companies take to the problem of underwater stock options.

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Can restricted stock and performance shares go underwater?

Not in the way stock options can. Restricted stock is worth the full market value of the stock when it vests or, with restricted stock units (RSUs), when shares are delivered. It does not matter if the stock price has dropped since the grant date. However, the value of the grant goes down (or up) by the same percentage that your company's stock price does.

Example: You receive a grant of restricted stock/RSUs when the market price is $25 per share.

• The stock price drops 20%, to $20.
• The value of the stock you receive is thus $20 per share.
• At $20 per share, stock options granted at $25 would be $5 underwater.
• If the stock price increases to $30 at vesting/delivery, your stock is worth $30 per share.

The grant may lose value if the stock price drops, but the value cannot fall to $0 unless the stock price does. Since restricted stock always has value and usually in a public company does not require purchase (there is no exercise price as with stock options), companies grant fewer shares of restricted stock or RSUs than options, as another FAQ discusses. In companies that grant early-exercise stock options, the price you paid to exercise the option to get restricted stock may be higher than the stock's value later; however, that is not considered underwater.

At vesting you pay taxes on the value of the shares you receive (or at grant if you make a Section 83(b) election, which is available for restricted stock but not for RSUs). When you sell them, you will have a capital loss for any drop in value after vesting.

Down markets can also impact the size or value of your grants, depending on the grant guidelines your company uses (see a related FAQ).

Performance Grants

With performance-vesting restricted stock or performance shares, a decrease in your company's stock price or financial condition could, depending on the goal or metric used for payout or vesting, result in no shares. In this situation, very few companies make any adjustment in the goals or provide the discretion to still allow a payout.

While this is how these plans are supposed to work, some companies decide that the design and metrics need tweaking in future grants. If you are a senior executive subject to the 162(m) $1 million compensation cap, the discretion of your company to modify outstanding grants will also be limited for grants made on or after November 2, 2017.

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7 Things To Know When You Sell Company Stock To Raise Cash
For reasons beyond your control, you may find yourself in a position where you suddenly need to sell stock for cash to meet urgent living expenses. When selling stock you must always proceed with caution. Review this checklist of topics to understand on tax, company, brokerage firm, and SEC rules.

ESPPs Offer Special Benefits In Down And Volatile Markets
ESPPs cannot be "underwater" like stock options, but a declining stock price can have an impact on your plan participation and the tax consequences. This article explains what you need to know for participating in your company's ESPP with a falling or volatile stock price.

Stomach Volatility In Your Company's Stock Without Losing Your Mind
Stock options, restricted stock units, and other types of equity compensation are valuable benefits. However, when the company's stock price becomes a rollercoaster, remember that equity compensation is a long-term deal. This article offers expert advice for coping with stock-price volatility.

Stockbrokers' Secrets: Equity Compensation Strategies For Volatile Markets
Market volatility and stock-price declines rattle even the most experienced holders of stock compensation (and their financial advisors). Sooner or later, volatility or downturns may force you to make decisions that affect your financial future and long-term wealth. This article presents topics that I find myself discussing over and over again with my best clients.

Job Loss And Your Stock Grants (Parts 1 and 2): Options, Restricted Stock, And ESPPs
Whether it is expected or not, job loss is an upheaval that gives you a lot to think about. However, as you clear off your desk, don't forget your stock compensation. Part 1 covers the post-termination rules of your stock grants. Part 2 covers important aspects of job termination that apply to all stock grants.

Preventing Irrational Decisions About Selling Company Stock Or Exercising Options
Whether you are a novice or advanced investor, it can be hard to decide what to do with your company's stock grants. Should you exercise options now or wait? Should you hold company stock at vesting or sell it and reinvest? Behavioral economics and investor psychology offer insights that can help you develop a personally acceptable approach.

Insider Trading: How To Stay Out Of Trouble
Trading company stock or tipping others to buy or sell it can get you into serious legal trouble when you know important confidential information about your employer or other companies you work with. This article explains what you need to know to stay out of trouble for insider trading.

Reframing Your Stock Option Exercise Strategy In Volatile Markets
Your option grant terms and the behavior of your company's stock price are only part of your financial-planning story in volatile markets. Equally important is the price movement of what you will buy with the proceeds from an option exercise and stock sale. As this article explains, relative changes in price, not absolute changes, are what matter.

Better Late Than Never: Stock Option Strategy For The Market Upturn
When stock markets rise, question the urge to exercise your options for quick profits as soon as possible. Exercising too early can be a big mistake.

Psychological Factors Affect Your Stock Option Exercise Decisions
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 examines the psychological factors that can, along with economic motives, influence your stock option choices.

Using Behavioral Finance To Shape Planning For Stock Compensation
Emotions can have a powerful impact on financial decisionmaking. The study of behavioral finance, i.e. how people make decisions about investments and other financial matters, can help you to develop a sensible approach to stock compensation and holdings of company stock.

Equity Compensation Strategies For Down And Rising Markets
Even when stock prices are volatile, there are still opportunities to achieve gains from stock compensation. This article presents a range of ideas to consider: buying stock now to swap later, exercising and holding ISOs, or making a Section 83(b) election for restricted stock.

The Equity Compensation Planning Dilemma For Corporate Executives
Podcast included! Executives must carefully balance the demands of many constituencies interested in their company's stock. Explores ways to manage these pressures while achieving financial goals.

Strategies For Negotiating A Compensation Package In Down Markets
A down market provides ideal circumstances for negotiating a larger stake of equity compensation as part of your pay package. With companies looking to conserve cash and find effective ways to recruit, retain, and motivate executives and key employees, your interest in this type of compensation may be well received. This article explores the possibilities you may want to consider if this opportunity arises.

In addition, many FAQs cover numerous related topics in the sections Job Events, Life Events, and Financial Planning.

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The pandemic is impacting both company approaches to stock compensation and the financial-planning strategies that advisors need to consider for clients with equity comp. After a wild downturn and upswing in the stock markets, financial planning continues to be tested by ongoing stock-price volatility, economic uncertainty, corporate layoffs, and indefinite employment furloughs. It is more important than ever for financial advisors to re-evaluate their planning approaches.

On July 22 (2:00pm–3:00pm ET), myStockOptions will hold a webinar featuring a panel discussion of these topics, moderated by our editor-in-chief Bruce Brumberg. Panelists will be financial advisors Meg Bartelt (Flow Financial Planning), Tim Kochis (Kochis Global), and Jane Yoo (Jane Financial), and compensation consultant C.J. Van Ostenbridge (Infinite Equity). The program will offer 1.0 CE credit hour for Certified Financial Planners (CFPs).

First, we'll talk about whether and how companies are changing their stock grants, including approaching to underwater stock options, and what this means for stock comp financial planning. Then we will cover:

• what to do with vested stock options
• strategies for NQSOS and ISOs
• whether to immediately sell restricted stock/RSUs when the grant vests
• whether to participate in an ESPP and its benefits even in down markets
• special strategies for grants in private companies
• helping clients with stock compensation through layoffs, furloughs, and new job opportunities

Register now for this unique virtual event.

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Covid-19 prompted the IRS to delay the usual April 15 federal tax-return deadline to July 15, but it isn’t just 2019 tax returns that are due. The IRS also postponed the first two 2020 quarterly estimated-tax payments, which are normally owed by April 15 and June 15. This means that on July 15 it’s possible for someone to owe half their estimated taxes for 2020 plus any taxes owed with their 2019 tax return.

The myStockOptions Tax Center has all of the educational resources you need to get through the weird tax season of 2020. Our comprehensive guide to tax-return reporting features our popular FAQs on how to report sales of company stock, which include annotated diagrams of Form 8949 and Schedule D of IRS Form 1040.

The Tax Center also features valuable FAQs on paying estimated taxes for stock options, restricted stock/RSUs, and other forms of equity comp, plus related financial-planning strategies.

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Learning Centers at myStockOptions.com and myNQDC.com offer convenient continuing education (CE) credits for CEPs, CFPs, and other professionals

The myStockOptions.com Learning Center has courses of study and exams that offer:

• 35 CE credits for Certified Equity Professionals (over 100% of the total requirement)

• 18 CE credits for Certified Financial Planners (60% of the total requirement)

• 21 CE credits for CPWAs and CIMAs (52.5% of the total requirement)

• CPE for Certified Public Accountants (CPAs) and CE for CFA Charterholders (see the Learning Center for information)

Each course of study features podcasts, articles, and FAQs from myStockOptions.com. They are woven into a dynamic, interactive learning tool that teaches the topics in a memorable way. The answer key for each exam also links to relevant content on the site for further reading and learning.

Seven Self-Study Courses

• NEW! Taxation & Tax Reporting: Course of Study and Exam
• Nonqualified Stock Options: Course of Study and Exam
• Restricted Stock, RSUs, and Performance Shares: Course of Study and Exam
• Employee Stock Purchase Plans: Course of Study and Exam
• Financial Planning with Stock Compensation: Course of Study and Exam
• Basics of SEC Law: Course of Study and Exam
• Incentive Stock Options: Course of Study and Exam (not available for CFP credit)

Built on a similar model, the the myNQDC.com Learning Center on nonqualified deferred compensation offers up to 6 continuing-education credits for Certified Financial Planners, 6 Professional Achievement in Continuing Education (PACE) credit hours for CLU® and ChFC® certifications, and up to 12 CPE hours for credentialed ASPPA members.

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