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Stock Options
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Employee Stock Options - Service 3 Example
Example Customer Need for Service 3
"I am concerned that the market may go down and my options will drop in value. My options are non-qualified stock options. Can you tell me what my gain and tax consequences would be if I exercised my options right now? I am trying to determine if I should exercise and sell them before they drop in price."
Example Customer Inputs for Service 3
Example Output to Customer for Service 3
Most companies offer three different methods for exercising your nonqualified stock options. The methods are listed below, showing gain on exercise, tax, net gain, cash outlay, cash received, number of shares owned and value of stock owned after exercise.
Same Day Sale
When doing a Same Day Sale or Cashless Exercise, the company gives the employee an amount of cash equal to the difference between the market price of the stock and the strike price (grant price) of the options, minus any taxes that are due, upon exercise of the options.
|
Gain on Exercise: |
$50,000.00 |
|
Tax (47.9%): |
$23,950.00 |
|
Net Gain: |
$26,050.00 |
|
Cash Outlay: |
$0.00 |
|
Cash Received: |
$26,050.00 |
|
Value of Stock Owned: |
$0.00 |
|
# of Shares Owned: |
0 |
Cash Exercise
When doing a Cash Exercise, the employee buys the stock at the strike price (grant price) of the options. She must also pay taxes equal to her net gain, since she is able to purchase the stock at a lower price than the market price of the stock.
|
Gain on Exercise: |
$50,000.00 |
|
Tax (47.9%): |
$23,950.00 |
|
Net Gain: |
$26,050.00 |
|
Cash Outlay: |
$223,950.00 |
|
Cash Received: |
$0.00 |
|
Value of Stock Owned: |
$250,000.00 |
|
# of Shares Owned: |
10,000 |
Sell to Cover
The employee sells just enough of the shares acquired through exercising the options, to pay the costs and taxes, allowing her to keep the remaining shares without any cash outlay.
|
Gain on Exercise: |
$50,000.00 |
|
Tax (47.9%): |
$23,950.00 |
|
Net Gain: |
$26,050.00 |
|
Cash Outlay: |
$0.00 |
|
Cash Received: |
$0.00 |
|
Value of Stock Owned: |
$26,050.00 |
|
# of Shares Owned: |
1,042 |
In your case, if you are sure that you want to exercise your options, you will probably want to do a same day sale because it maximizes the cash you receive and avoids stock ownership, since you feel the price of the stock will be going down. However, you should use Service 2 to make projections to see what the fair value of your options will be if you don't exercise the shares, even though the price of your company stock will go down. That alternative may be better in your case, unless there is a drastic drop in price.
When a non-qualified stock option is exercised, the employee must pay ordinary income tax on the "spread" between stock price at the time of exercise and the strike price, whether the employee sells or holds the underlying stock after it is exercised.
If you do the Same Day Sale, you will realize a gain of $50,000.00. Your taxes at a 47.9% marginal rate will total $23,950.00, yielding a net gain of $26,050.00. None of your gain will be converted to stock, since you feel that the price will be falling.
Example Benefits to This Customer
This customer was expecting a drop in price of her company stock and was wanting to evaluate the different methods of exercising her stock options. She was presented with three alternative methods for exercising the options and shown the differences that each method makes in her gain on exercise, tax, net gain, cash outlay, cash received, number of shares owned, and value of stock owned after exercise. She was shown which method would work best for her circumstances if she was determined to exercise her options.
She was also advised to use Service 2 to make projections to determine what the fair value of her options would be if the stock price did indeed drop as she expected. Service 2 showed her that even if the price drops as she expected, the options would still have a higher fair value at the time of the price drop, than the proceeds from exercising her options right now while the price is still high. This saved her from making a potentially bad decision of exercising the options, in this case. Had the actual numbers been different though, it could lead to a completely different decision.
Analyze Your Employee Stock Options Today
Find Out the Fair Value of Your Options Now and make Projections for the Future!
Use our employee stock option analysis services to find out the fair value of your options right now and make projections to see what they should be worth in the future. Pick the best time to exercise your options and find out how much money you will walk away with. Maximize Your Retirement Funds!
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