Daniel Zajac, CFP®

Incentive Stock Options and Executive Compensation

employee stock options

Have Equity Compensation? Here Are 8 Steps To Take in the New Year

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A new year can be an opportune time to review your equity compensation package. Not only does this give you a clean slate to work with, but it also affords you the most time to plan and implement your strategy for the fresh calendar year ahead.

When it comes to annual planning for your equity compensation, you’ll want to consider a number of items. To get started, you might want to ask (and get answers to) questions like:

  • What type of equity compensation do I own?
  • What are the tax implications of what I have?
  • Should I continue to hold shares that I own, or should I sell and diversify my portfolio?
  • How do the actions and decisions I’m considering fit into my overall financial plan?

You’ll likely have other questions too. But these are some of the commonly asked ones and provide a good place for you to start. Once you have some of the answers, you can begin to develop a plan that works for you.

To further help you with the planning you should do for your equity compensation in the new year, use this list of 8 steps you can take to best position yourself to create a smart strategy.

1 – Review What Occurred with Your Equity Compensation Last Year

The beginning of the year is a great time to review what you accomplished in the previous year. It’s also a is a good time for a gut check and self-reflection on your equity compensation plan and how well you are using it to achieve your goals and objectives.

One way to test your success is to evaluate your plan, and review how well (or not) you stuck to that plan during the previous year. If you struggled to execute or implement your strategy, it might be a smart move to reach out to a financial advisor to help you and hold you accountable for the actions you need to take.

2 – Determine If You Have Stock Options or Restricted Stock Units That Vest This Year

If you have equity compensation that is set to vest this coming year, pay close attention to the details around these events. You will likely need to make a number of decisions about what to do with these shares once vested.

If you have restricted stock units, their value will be taxed as ordinary income. You’ll want to include this income in your tax and cash flow planning. You’ll also want to plan the next step for your vested RSUs.

One option might be to retain vested RSU shares post vesting in hopes the stock price will go up in value. A second option might be to sell shares immediately and redirect the proceeds into something else (like contributing to a savings goal, paying down debt, or allocating the funds into a more diversified portfolio).

If you have incentive stock options or non-qualified stock options, vesting shares will likely have no immediate impact on your tax return. Vesting simply gives you the right to act upon the option, not the obligation to do so.

But knowing that you’ll soon have that right once your shares vest, now is the ideal time to review your exercise and sell strategy.

If your stock options are deep in the money, meaning the fair market value of the stock is significantly higher than the exercise price, you may want to consider capturing that value. This may mean an exercise and sell of some (or all) shares. Otherwise, you may choose to keep your options as is and wait to exercise them.

The decision to exercise, hold, and sell your incentive stock options and non-qualified stock options is complicated. You should consider how your options are taxed (ISOs and NSOs are taxed differently), how it may impact your cash flow (by asking questions like, can you afford the cost of exercising?), and how it impacts your financial plan.

3 – Check for Equity Compensation That May Expire Soon

It’s important to periodically review the expiration date of your incentive and non-qualified stock options. If the options are set to expire this year and they’re in-the-money, exercising them before that expiration date might be a good choice.

If you don’t exercise the options before they expire, you lose any embedded value of the option. If you do exercise, you’ll want to consider a few things, including but not limited to:

  • When during the calendar year you want to exercise?
  • What are the tax implications if you choose to exercise?
  • How does an exercise of stock options impact your cash flow?
  • What will you do with the shares that you can exercise? Keep them, sell them, or sell some and keep others?

It also makes sense to take note of shares that are set to expire in the next year or two, because exercising now could be a better move than waiting until the last minute.

That’s not always the case, but this is why it’s wise to investigate now so you have time to make decisions and act accordingly. There’s no one “right” answer that applies in every situation, and you may need to do a detailed analysis of your personal plan to determine what might be best for you.

4 – Determine If You’ll Have a Qualifying Disposition with Any ISOs or ESPP Shares

A qualifying disposition of incentive stock options is one in which the final sale occurs at least 2 years from the grant date and 1 year from the exercise date of the option. If you have shares that are set to meet this requirement this year, you should identify them and create a plan.

These shares are especially important because the full gain from the exercise price of the stock to the final sale price is taxed as a long-term capital gain. They may also be advantageous when it comes to getting an AMT credit.

If you have employee stock purchase plan shares that meet the rules for a qualifying disposition, you may want to evaluate what to do next with these, too. Meeting the requirement may allow you to benefit from long-term capital gains tax rates on the majority of the proceeds of the sale.

(Note that the rules around this can get a bit nuanced, so you’ll want to read this to make sure you understand them first.)

The beginning of the year is a good time to identify newly-minted qualifying shares, as well as qualifying shares from previous years that have not been sold.  Once identified, you can further consider a plan for exactly what to do with these shares.

5 – Develop a Strategy to Exercise Some (or All) Shares

The beginning of the year can be a good time to exercise some of your shares from vested incentive stock options. An exercise early in the year may allow you to best manage your cash flow and give you the opportunity to see how the stock performs prior to locking in a single tax event.

Taxes triggered by exercising, holding, and later selling incentive stock options are not due until tax filing time in the year following the year of exercise. You may be able to exercise your shares, hold them for 1 year, sell them, and use the proceeds to pay the pending tax — all as a qualifying disposition.

An early in the calendar year exercise may also allow you to better manage the alternative minimum tax. If the stock price increases between the exercise date and the end of the year, you may want to keep the stock to reap the benefits of long-term capital gains rates.

If the stock price decreases, however, selling your ISO shares in a disqualifying disposition may make more sense. A disqualifying disposition in the same calendar year will eliminate the AMT adjustment for the calendar year, removing some of the impacts of paying the AMT.

Note that this will cause the gains (if any) to be taxed at ordinary income rates, but the proceeds of the sale will be available to pay the requisite tax due. This can help make it easier to manage the cash flow aspects of the transaction.

6 – Review and Adjust for New Grants Received

If you’re on the receiving end of new restricted stock units or other employee stock options, you’ll want to consider how these fit into your plan.

To start the process of integrating newly issued grants into the plan, you’ll want to consider what type of grant it is, when the grant vests, and how it will be taxed (amongst other things).

With that key information, you can begin to fit the new grants into your strategic and tactical decision making.

7 – Review and Plan for Estimated Taxes

Now is also a good time to complete a review of your expected tax return. Once the previous year is over, you can be certain of your transactions and make a final estimate of what your income tax liability (or refund) may be.

The tax implications of dealing with equity compensation will depend on the types of compensation you have, whether or not you exercised and sold shares, or had shares vest.

For example, restricted stock units and non-qualified stock options are likely subject to ordinary income, Medicare, and Social Security taxes. Income taxes may also be withheld on RSUs when they vest (and the same happens with exercised NQSOs) through a cashless transaction or a share withholding by your company.

This withholding may help alleviate a potential tax burden down the road, but the forced withholding may or may not be enough to cover your total tax need. You need to run your own numbers to confirm enough taxes were held back, and if not, plan to set aside some cash to pay what is still owed.

If you have incentive stock or ESPP shares, taxes probably won’t be withheld at all. In this case, you’ll need to plan for estimated tax payments or for a larger tax bill next spring.

Complicated tax rules are one reason why you may want to consider your overall financial and tax plan before you exercise or sell your shares. An uninformed employee who decides to exercise may create a tax liability that is bigger than they can actually afford. Being aware of cash flow when you exercise your options is a critical part of the conversation.

8 – See If You Are on Track to Meet Your Goals

Equity compensation can be a fantastic way to increase your wealth — but it also means handling an increased responsibility to understand how your equity compensation works, how it is taxed, and how to make the best decisions with this potential tool for growing wealth at an exponential rate.

The new year is a great time to review how your equity compensation is (or isn’t) helping your reach your financial goals. These could include preparing for retirement, buying a new home, funding college tuition, and so on.

Part of this review includes an honest assessment of what your goals may be. Is your primary goal to minimize the amount of tax you pay on your equity compensation? Or is your goal to grow your account balance so high that you amass generational wealth?

Another goal may be to use your equity compensation to set a reasonable financial goal that targets financial freedom, or perhaps you’re working on controlling your cash flow and have past debts that you need to repay.

Whatever your specific goals and values are, now is a good time to evaluate how close you are to achieving what’s most important to you.

And if you’ve “made it,” it may make sense to consider what risk you retain by keeping shares of a single stock. Typically, a single stock brings with it a more volatile position as compared to a more diversified portfolio. You may run the risk that you go from “made it” to “not there yet” should the stock price drop.

To best set yourself up for success, it takes a combination of understanding the tactical aspects regarding what types of equity you own, what the rules of the plan may be, how said compensation is taxed, and how it will impact your cash flow.

These details should be integrated into a strategic financial plan that is targeted towards meeting your personal goals and objectives.

The content herein is for illustrative purposes only and does not attempt to predict actual results of any particular investment.   Diversification does not guarantee a profit or protect against a loss.  None of the information in this document should be considered as tax advice.  You should consult your tax advisor for information concerning your individual situation.  Tax services are not offered through, or supervised by, The Lincoln Investment Companies.

9 Year-End Planning Tips for Your Equity Compensation

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You might not give much thought to the equity compensation you receive throughout the year (until you’re forced to take action with it). But even if you do have a long-term plan in mind, it’s smart to pause periodically and review the overall strategy.

The end of the year is a prime opportunity for this review, and also provides a chance to check in and recall any decisions made during the calendar year. Not only will this allow you to stay abreast of your current situation, it may be the right time to implement decisions that could have a material impact on your investments, income tax, and cash flow in this year or the next.

Here are 9 considerations to keep in mind during a year-end review of your equity compensation.

1 – Take Stock of What You Have (and What You Have Done)

The end of the year is a good time to take an inventory of your equity compensation package. This may start with a simple review of what’s included.

Do you have incentive stock options, non-qualified stock options, restricted stock units, an employee stock purchase plan, or stock appreciation rights? Know what you have and make sure you have a basic understanding of the rules and important information around each type of equity comp in your package.

Next, consider a more detailed review of individual grants. Individual grant review can provide you more granular detail such as vesting dates, expiration dates, exercise price, and other key information.

Grant information may also lead you to explore your previous exercise history, any AMT that might be due or any AMT credits coming back to you, vesting history, and current stock owned outright.

This year-end process is about understanding what you have, what you can do with it, when you can do something, and what planning opportunities may arise. You can only make sound decisions around properly coordinating your equity compensation with your financial plan if you know what you have and what actions you’ve already taken.

2 – Exercise Incentive Stock Options Shares Up to the AMT Crossover Point

If you hold in-the-money incentive stock options and do not expect to owe alternative minimum tax when projecting your tax return, you may want to consider exercising your ISOs so that the bargain element is just enough that your tentative minimum tax is equal to your regular minimum tax.

The net result of this transaction means that you will exercise and hold just enough ISOs that you will not owe AMT.

One benefit of this AMT crossover strategy is that you begin the holding period requirements to achieve a qualifying disposition of your exercised-and-held ISOs. A second benefit is that you do so without the commonly-required cash outlay required if you exercised ISOs to cover the AMT.

Keep in mind there is risk associated with this strategy. Even though you may not owe AMT on this type of exercise, you will be required to pay for the exercise cost of the shares themselves. This requires you to put cash (or its equivalent) into the transaction — and in theory, you could lose that money if the stock price drops in value.

You should also be aware that this strategy may or may not make a material impact on how many ISO shares you have exercised and held, versus how many you control. If you have a lot of ISOs, this may only allow you to exercise a few of them, but it does provide the benefit of beginning the holding period for a qualifying disposition.

3 – Sell Incentive Stock Option Shares That Are Down in Value

Year-end is a good time to review the current value of any incentive stock option shares that you exercised and held early in the calendar year.

If the prevailing fair market value of the stock is lower than fair market value on the date you exercised, you may want to evaluate the opportunity to sell these shares and intentionally create a disqualifying disposition.

When you exercise and hold, the bargain element is a determining factor in whether or not you owe AMT. If the bargain element is big, it may lead to a large AMT bill.

But if the stock price drops between the time you exercise and the end of the year, you may find yourself wishing that you hadn’t exercised because the cost of the AMT is going to unaffordable (or, at the very least, undesirable).

Assuming this is the case, selling the shares that were exercised and held early in the calendar year will “undo” the AMT preference item requirement and eliminate your AMT bill. Selling in this scenario leads to a disqualifying disposition, and you will likely need to pay ordinary income tax on the spread between the exercise price and the final sales price of the stock.

While paying ordinary income may not seem as desirable as paying long term capital gains, a falling stock price post-exercise and the ability to undo AMT might create a situation where it could be just the right opportunity for bigger-picture income tax planning and cash flow planning.

4 – Review the Possibility of Accelerating an AMT Credit

The alternative minimum tax is a bit like a prepayment of expected income tax on your exercised and held incentive stock options. But this prepayment often requires you to pay more in taxes than you otherwise would have, leading to a net cash flow.

Eventually, when you sell your ISO shares in a qualifying disposition, you might have the opportunity to receive your AMT back in the form of a credit.

If you have qualifying ISO shares, the end of the year could be a good time to evaluate whether or not you should sell those shares. Selling the shares may not only result in reduced position in company stock and a positive cash inflow from the proceeds, it may result in receiving your AMT credit back sooner rather than later.

5 – Review Your Strategy for Vested Restricted Stock and Exercised Non-Qualified Stock Options

Generally speaking, when restricted stock units (or awards) vest and you exercise non-qualified stock options, each type of compensation is taxed as ordinary income and paid to you via a cashless transaction.

A cashless transaction means that the value of the unit or option is paid in company stock, after subtracting some amount for income tax withholding (usually 22%). But you don’t need to keep the shares simply because the value of the equity compensation was paid to you in shares.

The end of the year is a good time to evaluate whether or not you should keep those shares, or sell them.

If you want to limit your concentrated position in a single stock, selling shares obtained during the calendar year may be an attractive strategy. If the prevailing market price is near the price at which the shares vested or were exercised, the additional tax implications to sell may be minimal as you only need to pay capital gains (loss) on the amount in excess of the cost basis.

From a cash flow standpoint, this may mean you will receive nearly the full proceeds of the sale. You can then use these proceeds to address some of your other financial planning goals and objectives.

6 – Consider Liquidating ESPP Shares

Much like RSU and NQSOs, you should evaluate your ESPP at year-end. Participation in a good ESPP that offers a discount on the purchase price and a lookback provision can be a good reason to participate in the plan to your fullest capability.

Retaining company stock in an effort to achieve a qualifying disposition and preferential tax treatment, on the other hand, may or may not be as attractive as it seems. To do so, you have to hold the ESPP shares for at least a full year after receiving them, which subjects you to the market risk of owning a single stock.

Consider your ESPP strategy and how much you currently participate. Do you need to make adjustments to bring that strategy in line with your overall financial plan or risk tolerance? Should you retain or sell your ESPP shares to accomplish that?

These are important questions to ask when reviewing your current use of an ESPP.

7 – Evaluate the Opportunity to Accelerate Income into This Calendar Year

If you find yourself in a low-income tax year, or expect to be in a significantly higher tax bracket next year, it may make sense to accelerate some of your income into this calendar year. Generally speaking, accelerating income can be accomplished in two ways:

First, you can accelerate income by exercising non-qualified stock options.

When you exercise NQSOs, the bargain element is treated as compensation income in the year of exercise. Another consideration may be to exercise and sell your ISO as a disqualifying disposition. This transaction may also have the impact of accelerating ordinary income into this calendar year.

A second option may be to sell previously held stock.

If you hold shares that have experienced a long-term capital gains outright, selling those shares may mean you are able to capture the gains at a preferential tax treatment. If your income is low enough, your long-term capital gains may not be taxed at all.

8 – Evaluate Your Projected Income Tax Due (and See If You Might Get a Refund)

In a year that you have restricted stock that vests and/or stock options that you exercised, projecting and paying income tax can be complicated. Year-end can be a good time to project your tax return to see if you have paid enough tax to cover your tax bill.

To do so, you might want to consider a few things:

First, you should calculate what you expect to owe in income tax for the year. This may include income tax from RSUs and NQSOs that will be subject to ordinary income tax treatment, or from AMT and/or capital gains taxes more commonly associated with ISOs.

Once you know what your tax bill is projected to be, you can determine if you have withheld enough via payroll deductions and estimated tax payments to cover the projection.

Companies will often withhold income tax on RSUs and NQSOs at a statutory federal income tax rate of 22%. (With ISOs, you usually won’t have any money withheld from your paycheck.) This may or may not be enough to cover your total tax bill, so this is important to figure out even if your company already withheld some money from your salary.

If you feel as though you underpaid your income tax, you may want to make an estimated tax payment to cover the need, or set aside cash to pay the tax due when your return is prepared.

9 – Plan for Next Year

As part of a year-end review, you might want to evaluate whether or not you have RSUs that vest, stock options that are set to expire, or ISOs that will meet the qualifying disposition standard.

If you understand what is expected and project a future tax return, it may lead to planning opportunities such as coordinating equity compensation with other employee benefits like a nonqualified deferred compensation plan, or an increase in your current 401(k) deferral rates.

This may also lead to opportunities around cash flow planning. If you expect a large sale of stock or a large vesting of RSUs, you want to plan for what you will do with the proceeds. This is where proactive financial planning may come in to play.

If You Want to Make the Most of Your Equity Comp, Plan a Year-End Review

Year-end planning for equity compensation is more than an arbitrary timeline at which to review your needs. It’s a time when income tax, cash flow, and investment risk can all be materially impacted by decisions (or non-decisions) prior to the close of business on December 31.

While the list above is not a complete list of planning considerations, it does provide a primer in to some of the things you may want to consider.

Keep in mind, however, that each one of these topics can be complicated, and by combining several into a coherent plan may require the skills of an accountant, a financial planner, an investment guru, and most important your personal goals and objectives.

The content herein is for illustrative purposes only and does not attempt to predict actual results of any particular investment.   Diversification does not guarantee a profit or protect against a loss.  None of the information in this document should be considered as tax advice.  You should consult your tax advisor for information concerning your individual situation.  Tax services are not offered through, or supervised by, The Lincoln Investment Companies.

7 Things You Should Know About Incentive Stock Options

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Incentive stock options (ISOs) are a form of compensation distributed by a company to their employees. Typically, companies use ISOs as a vehicle to retain top employees, reward specific milestones or successes or as an incentive when hiring new employees.

ISOs can be a lucrative long-term compensation benefit, particularly if you work for a company that is growing quickly and has a rising stock price. Because they may be highly valuable, incentive stock options have several components that are worth studying.

1 – What is an Incentive Stock Option?

An incentive stock option is a specific type of employee stock option that allows you the right to purchase shares of stock at a predetermined price at some point in the future. You are given – or “granted” – a certain number of incentive stock options allowing you to purchase that number of shares of stock.

When you purchase company stock shares via your option, the process is known as exercising your incentive stock options. There are several aspects to exercising your options, as you’ll see below.

2 – How Do You Receive Incentive Stock Options?

You are awarded incentive stock options from your company in the form of an option grant. Usually you’ll be required to “accept” the option grant before it becomes official by signing an acceptance form. This is a formality.

When you receive an incentive stock option grant from your company, it will include several elements that will impact what you can do with your options and when. This information will likely be provided in a combination of documents including the plan document, the plan prospectus, and your specific stock grant details.  It may be wise to obtain this information from your HR department, as company plan rules can differ.

3 – What is Included in an Incentive Stock Option Grant?

Your ISO grant will include the number of share options you are being granted. This is equal to the number of shares you can exercise and buy.

The ISO grant will also include a share price, called the “strike” price or “exercise” price, which is often set by the stock price on the day the company completes the option paperwork. The exercise price determines how much you will pay for each incentive stock option.  This price, multiplied by the number of granted options will tell you how much it will cost you to exercise all your options.

Your ISOs will also include a grant date. This is important because it may affect both when you can exercise your options and the tax implications, which we’ll cover shortly.

The option grant will also include a vesting schedule. The vesting schedule is the timeframe that dictates when you can exercise your stock options.

For example, a 5-year schedule might vest 20% of the ISOs per year until fully vested. Often, vesting schedules are designed to reward you for staying with the company for longer periods of time and can be used as a retention tool for valued employees. Should you leave the company before your ISOs vest, the options may be subject a forfeiture provision where the company will take back unvested options upon your departure.

4 – What is the Process for Exercising Your Incentive Stock Options?

You can exercise ISOs in one of several ways. The approach you choose will depend on your short- and long-term financial goals, cash position, tax situation, need for immediate income, among others. This is an important decision and often worth consulting an investment professional to determine the best approach for your situation.

First, after some or all of your incentive stock options have vested, you can pay cash up front to purchase them. For example, if you were granted 1000 options at an exercise price of $10 per share, once vested, you could purchase the 1000 shares of stock for $10,000 (1000 x $10 = $10,000.) While this is a large sum of cash, purchasing the shares up front can be advantageous if you plan to hold the shares for a long period of time to take advantage of certain tax benefits and hoped-for stock price increases.

You can also exercise your ISOs through a cashless transaction where you immediately sell your vested shares as soon as they are exercised, using the profits to pay for the option costs, and potential taxes, keeping the remainder.

A third approach is to sell enough of the ISOs to pay for the cost of exercising the options, converting the remaining ISOs into shares of stock and holding the stock until a future date.  Assuming the company stock has increased in value since your incentive stock options were awarded, you can sell a portion and take the profits to pay for the remaining shares.

For example, by selling 100 shares @ $100 each, you will receive $10,000, enough funds to pay for all 1000 shares. After selling the 100 shares, you will own the 900 remaining shares.

5 – When Should I Exercise My Incentive Stock Options?

There are a number of factors that affect when you should exercise your ISOs. Again, this is a topic where a financial expert can be invaluable.

Of course, you’ll only be eligible to exercise your ISOs once they have vested. Fortunately, you are allowed to exercise the options as soon as they vest, in most circumstances.

In our earlier example, where 1000 ISOs vested 20% per year over five years, after year one, you would be eligible to exercise 200 ISOs (1000 x 20% = 200).

If the company’s stock has gone up since you were granted the ISO, it may make good sense to exercise the vested options, selling the shares in a cashless transaction and reaping the profits. Some factors that come into play in this decision include whether you need the funds in the near term, whether you’re concerned for the long-term health of the economy, general stock market trends, future prospects of the company, among others.

However, if you have confidence the company will continue to grow and the share price will continue to go up, you can consider waiting for a period of time before exercising your vested options.

Here’s a special circumstance to keep in mind. If you are deemed a company insider, that is, an executive with knowledge of the company’s strategic plans or potential future earnings, you may only be able to exercise options (or sell common stock) during what’s called a trading window, typically in the middle of a given fiscal quarter.  If you know you are an insider or you think you may be, you may want to consult your legal department before you do anything with your options.  This helps protect other shareholders who invest in the company but do not have access to the same level of information as company insiders.

6 – Should I Exercise My ISOs As Soon As They Vest, Or Wait?

When to exercise your ISOs is a judgment call based on a number of factors. First, do you have strong confidence that the company will continue to grow its revenues and, thus, its share price? Remember that often there are macroeconomic factors outside the company’s control that impact whether a company’s stock increases or decreases in value. Trying to predict the future always comes with risk.

Do you need the money now? Are there debts, college funds, a home down payment or other compelling factors that require immediate access to the funds? If so, exercising the ISOs and taking the associated profits can make good financial sense.

If your ISOs and perhaps employee stock purchases represent the lion’s share of your investment portfolio, diversifying your money by exercising your options and moving the profits to other investment vehicles may help protect your long-term financial prospects.

 7 – What are the Tax Implications of Incentive Stock Options?

When exercising ISOs, there are two primary possible tax treatments, called qualifying distributions and disqualifying distributions.

Qualifying distributions may help minimize your tax liability. Qualifying distributions apply when the final sale of the stock occurs at least two years after the option grant date and at least a year after the exercise date.

As a result, your entire profit from the transaction is taxed at long-term capital gains rates, 0%, 15% or 20%, rather than as ordinary income, likely a higher rate.  (Higher-income earners may also owe the 3.8% Medicare surtax on the net investment income.)

Disqualifying distributions occur when you exercise your options in any other way that does not meet the standard for qualifying disposition. One potential benefit of this approach is you have access to the funds from the stocks you sell. This helps protect you against a possible drop in the stock price while waiting to sell and you’ll know how much profit to expect from the transaction.

When you exercise your ISOs, the profit, or spread, is treated as income for alternative minimum tax (AMT) purposes. This could trigger having to paying the AMT in that tax year.

It’s helpful to be familiar with the various tax forms that are commonly associated with incentive stock options. For example, ISOs are reported on Form 1040. You may have ordinary income, capital gains (or losses), or both, which will be reported on your 1040 tax return.

Your Form W-2 will include any compensation income received from your employer shown on your W-2, including your income from ISOs upon selling your stock.

You will receive a Form 1099-B the year you sell your ISO stock shares. It reports capital gain or loss on your tax return.

Your employers will also provide a Form 3921 (Exercise of Incentive Stock Options) for the year you exercise ISOs. Information on the form will help you determine AMT, if applicable.

In the event you are required to pay the Alternative Minimum Tax from profits from selling ISO shares , you will need to file Form 6251 (Alternative Minimum Tax), which you use to report AMT from the exercise of incentive stock options.

If you have a financial advisor or tax accountant, they will be very familiar with these forms and can help you properly prepare your filings.

Moving Forward with Your Incentive Stock Options

Incentive stock options are a powerful tool that may help create great wealth. The more successful the company is, the more options you have, and the lower the exercise price, the more you may stand to gain as the company’s stock price climbs.

They are also potentially complicated compensation vehicles that integrate advanced tax, investment, and personal financial planning goals.  This is why it often takes a specialist in equity compensation or, more likely, a team of individuals to help plan for a suitable outcome.

This leads to the fact that there are a number of important decisions to consider when developing your financial strategy around your ISOs. It’s important to find an expert to help guide you, saving you money, time and possible tax liabilities down the road.

The content herein is for illustrative purposes only and does not attempt to predict actual results of any particular investment.   Diversification does not guarantee a profit or protect against a loss.  None of the information in this document should be considered as tax advice.  You should consult your tax advisor for information concerning your individual situation.  Tax services are not offered through, or supervised by, The Lincoln Investment Companies.

How Do You Pay the Exercise Cost When You Exercise Your Employee Stock Options?

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If you have employee stock options, you’ve likely spent time considering how and when to turn the value of those options into cash proceeds you can actually use.

To turn stock employee stock options into cash, you have to exercise and sell them.  When you exercise, you are buying shares of company stock at the exercise price of the employee stock option.

Buying shares of stock means that you still need to pay for them when you exercise — but you’re getting a bargain because the price you pay will likely be lower than the current market price of the stock itself.

The exact cost to exercise equals the number of shares you exercise multiplied by the exercise price of the stock option.

Understanding the Potential Costs of Exercising

Let’s assume you have the following:

Grant Shares Exercise Price FMV Exercise Cost Value
1 10,000 5.00 25.00 $50,000 $200,000

In this example, the exercise cost of 10,000 shares is $50,000.

However, you don’t have to exercise all your options at one time. If you only exercise 5,000 options (leaving you with 5,000 that can be exercised later), the exercise cost is $25,000, or 5,000 multiplied by $5 per share.

The same logic carries forward when you have multiple grants of stock options. For example, assume that you have the two employee stock option grants:

Grant Shares Exercise Price FMV Exercise Cost Value
1 10,000 5.00 25.00 $50,000 $200,000
2 5,000 8.00 25.00 $40,000 $85,000

The total exercise cost of both grants, or 15,000 shares, is $90,000. Again, you can choose to exercise a portion; you don’t have to exercise everything all at once. You can exercise only grant 1, for example, or only grant 2 — or some or all of each.

The kind of employee stock options you have may impact the cost of exercising, as well. This is because the exercise of an employee stock option is a taxable event.

In addition to the cost you pay to buy the shares, you may also need to pay tax. The type of tax you pay, when you pay it, and how much you pay will all depend on whether you have incentive stock options or non-qualified stock options.

Because of this it’s important to check your document and be sure of what kind of options you have before you take any actions with them. Checking in with a professional who can help you choose the right strategy might be a prudent move, as well.

Exercise Strategy 1 – Pay with Cash

A simple and clean way to pay the exercise cost is to pay with cash. With a cash exercise, you must deliver the cash required to pay the exercise cost when you exercise your options.

Doing a cash exercise may be a good strategy if you’re bullish on the future stock price of your company stock and if you want to maximize the number of shares you own.

If we assume that you exercise Grant 1 above, you will pay $50,000 to exercise the employee stock option. This $50,000 needs to come from assets you own already (like cash in a bank account).

Post-exercise, you will own 10,000 shares outright — but you’ll have less money in the bank since you needed to use some cash on hand to buy the shares.

A cash exercise is effectively the opposite of diversification. This can be a good thing or a bad thing based on your goals, risk tolerance, and how the stock performs in the future.

Exercise Strategy 2 – Buy Using Shares Acquired via the Exercise Itself

A second strategy to exercise your employee stock options is cashless exercise (or a sell-to-cover). With a cashless exercise, you use newly acquired shares via the exercise itself to cover the exercise cost.

This is accomplished by giving instructions that requests the immediate exercise and sell enough shares to cover the cost of the exercise. You can retain whatever shares you didn’t need to sell to cover the cost of exercising.

If we looked at Grant 1 above, we can see the exercise cost is $50,000. In order to cover this exercise cost via cashless exercise, we need to calculate how many of the 10,000 shares must be sold immediately post-exercise to pay for the exercise cost of the employee stock option.

The math to calculate the shares required is as follows:

“Cashless Shares Required” = “Exercise Cost” / “FMV at Exercise”

= $50,000 / $25

= 2,000

If you immediately exercise and sell 2,000 of your 10,000 shares, exercised at the current share price of $25/share, you will generate $50,000 of proceeds. You can use this $50,000 to cover the exercise cost.

That means you are left with 8,000 exercised shares that you hold outright. The post-exercise result of a cashless exercise is that you will own fewer shares than you would with a cash exercise — but it also saves you from having to shell out $50,000 in cash.

A cashless exercise may be good for someone seeking to limit or diversify their company stock position. It may also be appropriate for someone who doesn’t have the requisite cash on hand to cover the exercise cost.

Exercise Strategy 3 – Use Previously Owned Shares of Stock via a Stock Swap

In addition to using cash or a cashless exercise to exercise your employee stock options, you can also use shares you already own to cover the exercise cost. You do this via a stock swap.

A stock swap allows you to exchange a sufficient number of shares you already own to cover the exercise cost of newly acquired shares from the stock option. You can use long-only shares, vested RSUs, exercised NQSOs, employee stock purchase plan shares, and exercised incentive stock options in stock swaps.

Each type of owned stock may have different rules that should be understood if being used for a swap, and you should consider the impact of each when before choosing a  strategy to implement.

When you do a stock swap, the original holding period and tax cost basis will transition to the swapped shares in a non-taxable event.  However, the exercise itself is a taxable event.

Let’s assume the following:

Grant/Share Shares Exercise Price FMV Exercise Cost Value
Long-Only 10,000 – 25.00 – $250,000
NQSO 5,000 8.00 25.00 $40,000 $85,000

If the goal is to exercise 5,000 NQSOs, the cost to exercise will be $40,000. In lieu of paying cash or doing a cashless exercise, you can use some of your long-only shares to cover the cost.

To cover the $40,000 exercise cost, you will need to swap 1,600 long-only shares (1,600 x $25 per share equals $40,000).

Post-exercise, you will retain 8,400 long-only shares and 5,000 NQSO shares, now owned outright. That gives you a total of 13,400 shares.

Like a cashless exercise, a stock swap means that you will typically own fewer shares post-exercise than you will with a cash exercise. A stock swap may be a good option for someone who is seeking to limit exposure to company stock.

Exercise Strategy 4 – Use a Combination of Strategies 1, 2, and 3

For any number of reasons, a singular strategy to implement only options 1, 2, or 3 may not be appropriate. The best exercise strategy for you might actually be a combination of strategies 1, 2, and 3 above.

This might be true even if you used one strategy over another in the past. Every time you exercise gives you an opportunity to implement a different strategy.

For example, you may choose to exercise lot 1 in our example via a cash exercise. A year later when you go to exercise lot 2, you may choose a stock swap.

Regardless of what you decide to do, you need to be aware of the tax implications of any exercise. Those implications alone can generate a separate, additional cash call when you exercise or when you file your tax return.

The Bottom Line on Exercising Your Employee Stock Options

If you are seeking to exercise your employee stock options, it means they are in the money and you capture real value. That the good news. To capture that value, however, you need to pay the exercise cost.

You can do that in a number of ways, using any (or a combination of) the strategies outlined above. Bear in mind, however, that any kind of exercise can lead to other complications.

Personal financial planning goals, your available assets, your short- and long-term opinions of the company stock, and the pending income tax implications may make exercising your ESO a daunting responsibility.

If you find yourself with unanswered questions about how to pay for your exercise, when to exercise, and how this all fits together, you may want to reach out to a professional who can help.

The content herein is for illustrative purposes only and does not attempt to predict actual results of any particular investment.   Diversification does not guarantee a profit or protect against a loss.  None of the information in this document should be considered as tax advice.  You should consult your tax advisor for information concerning your individual situation.  Tax services are not offered through, or supervised by, The Lincoln Investment Companies.

How to Use a Stock Swap to Exercise Your Employee Stock Options

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A stock swap can be a great strategy to use if you have employee stock options you’d like to exercise and hold. It allows you to use the fair market value (FMV) of company stock you already own to pay for the exercise cost of newly acquired employee stock option shares.

Shares you own that can be used for a stock swap can include those you’ve purchased on the open market, shares acquired from vested restricted stock units, shares you own from an exercise and hold of previous employee stock options, and/or shares acquired from and employee stock purchase plan.

But be aware that each type of share you use in a swap can generate some very different tax implications. It’s a good idea to work with a professional to ensure you choose a specific strategy that makes sense in the context of your overall financial situation.

The First Step to a Stock Swap: Check Your Plan Document

If you are considering a stock swap, the first step may be to check your plan document. While many plans allow for a stock swap, you’ll want to be sure yours is one of them.

If your plan document allows, a stock swap may make sense if you don’t have the cash available to do a cash exercise. It may also make sense if you are not seeking to maximize the number of shares you own.

In fact, a stock swap will result in you having less value in company stock then you did prior to the exercise.

How a Stock Swap Works in the Real World

Let’s assume you own the following shares of company stock that you previously purchased on the open market. We will define these as long-only shares:

Long-Only Share Price Cost Basis / Share Total Value
10,000 $50.00 $20.00 $500,000

Let’s also assume that you want to exercise the following employee stock options or ESOs. For the sake of this immediate example, we will not distinguish between non-qualified stock options and incentive stock options (but we will cover each later in the article).

ESO Exercise Price Exercise Cost Current Share Price Total Value
5,000 $10.00 $50,000 $50.00 $250,000

The exercise cost of the ESO is $50,000. This cost can be paid for in a number of ways. You could do a cash exercise, a cashless exercise, or a stock swap.

If you are doing a stock swap, you pay the exercise cost of $50,000 by swapping the fair market value (FMV) of long-only shares equal to the exercise cost of the ESO.

If you held 10,000 long-only shares and wanted to exercise 5,000 ESOs, you will use fewer than 5,000 long-only shares to exercise and hold 5,000 employee stock options.

This is because you are using the FMV of long-only shares to buy ESO shares at the exercise price, which is lower than the FMV.

How many shares you need to swap is based on the spread between the FMV of the stock and the exercise price of the options:

Number of Shares Swapped = “Exercise Cost” / “Current Share Price”

=$50,000 / $50

= 1,000

You can swap 1,000 of your long-only shares to exercise the 5,000 employee stock options.

A swap is simply an additional way to exercise your options. More specifically, a stock swap may limit how many shares of stock you own and/or manage tax.

Stock Swaps and the Impact on Concentrated Equity

The end result of a stock swap is that you control fewer shares post-swap then you did pre-swap.

Prior to the stock swap, you had owned 10,000 long-only shares and the option to purchase 5,000 shares from the ESO. You “controlled” 15,000 shares.

After the stock swap, you have 9,000 long-only shares and 5,000 newly acquired shares from the exercise and hold of the ESO. You now “control” 14,000.

Because of this reduction in total shares controlled, a stock swap is one way to limit or decrease your concentrated equity position.  If may then make sense for someone who isn’t bullish on the stock or someone who wants to diversify their assets.

Comparing a Stock Swap to Other Exercise Methods

To evaluate whether a stock swap is a good idea or a bad idea, it makes sense to compare it to other exercise strategies. Two common strategies are a cash exercise and a cashless exercise.

A cash exercise may be a preferable strategy to stock swap if you are bullish on your company stock and want to retain as many shares as possible. With a cash exercise, you retain more shares post-exercise than you do with a stock swap.

In our example, you will pay $50,000 to exercise and hold the ESO. Since you paid cash, you will retain the 10,000 long-only shares you own and pick up an additional 5,000 shares from the ESO, for a total of 15,000 shares. This is 1,000 shares more than the swap stock in our example.

The second option is a cashless exercise. If you are not bullish on your company stock or want to diversify your concentrated position, a cashless exercise may be a better strategy for you.

In a cashless exercise, you use shares acquired via the exercise itself to cover the cost of the exercise. Continuing with numbers from our examples above, with a cashless exercise, you’d exercise and immediately sell 1,000 ESO shares.

Number of Shares to Cover = “Cost of Exercise” / “Current Share Price”

= $50,000 / $50

= 1,000

Since you sold 1,000 of your ESO to cover the cost, you retain the remaining 4,000. Post cashless exercise, you own 10,000 previously owned shares and 4,000 shares from the exercise and hold, for a total of 14,000 shares

Both the stock swap scenario and the cashless exercise scenario, you retain 14,000 shares. The post-exercise share control is identical.

However, by digging further, you will see that the shares come from different sources.

Long-Only ESO Shares Total Shares Cash Required
Cash Exercise 10,000 5,000 15,000 $50,000
Stock Swap 9,000 5,000 14,000 $0
Cashless Exercise 10,000 4,000 14,000 $0

This difference is important as we evaluate the tax impact if the employee stock options are non-qualified or incentive stock options.

Stock Swap and the Tax Impact for Non-Qualified Stock Options

When you use long-only stock to exercise non-qualified stock options (NQSO) via a stock swap, the swapped shares retain their original cost basis and acquisition date through the exercise.  Swapping shares is a non-taxable event.

However, the exercise itself is a taxable event subject to normal NQSO tax rules. This means that the bargain element of your exercised non-qualified stock options is subject to ordinary income, Medicare, and Social Security tax.

Let’s assume that you have the following NQSOs:

NQSO Exercise Price Exercise Cost Current Share Price Total Value
5,000 $10.00 $50,000 $50.00 $250,000

When you exercise your 5,000 non-qualified stock options, you will pay income tax on the bargain element of $200,000. You pay income tax regardless of how you pay for the exercise cost of your NQSO.

Assuming you do a stock swap of 1,000 long-only shares that have a cost basis of $20 per share, the cost basis of your retained shares will look like this:

Long-Only NQSO Shares Total
Shares 9,000 5,000 14,000
Cost Basis 9,000 at $20.00/share 1,000 at $20/share

4,000 at $50/share

 14,000
Total Cost Basis $180,000 $220,000 $400,000

After the swap, you retain 9,000 long-only shares. The cost basis of these 9,000 shares remains unchanged at $20/share. You have also acquired 5,000 newly owned shares from the exercise of the NQSO.

Of these shares, 1,000 will have a carryover basis (and holding period for calculating long term capital gains) of $20/share. The remaining 4,000 shares will have a cost basis of $50/share, which is the FMV at the time of exercise.

Stock Swaps and the Tax Impact for Incentive Stock Options

You can use long-only stock to exercise incentive stock options, too. Like NQSOs, the tax rules regarding an exercise of incentive stock options, or ISOs, are the same whether you exercise via a stock swap or via another method.

This means that when you exercise and hold ISOs, the bargain element will be a tax preference item for calculating the alternative minimum tax. It also means that exercised ISOs equal to the number of shares swapped will retain the cost basis of the original shares. However, the newly acquired shares via the exercise will likely have a basis equal to zero.

Continuing our example from above, but now assuming that you have ISOs, we can illustrate a stock swap for ISOs:

ISO Exercise Price Exercise Cost Current Share Price Total Value
5,000 $10.00 $50,000 $50.00 $250,000

If you exercise and hold ISOs in an attempt to achieve a qualifying disposition (hold the shares past year-end), you do not claim ordinary income in the year of exercise. Instead, the bargain element is a tax preference item for calculating the AMT.

Since the bargain element not claimed as ordinary income, it has no adjustment to that cost basis of the new shares. If we assume you do a stock swap of 1,000 long-only shares that have a cost basis of $20 per share, the cost basis of your retained ISO shares will look like this:

Long-Only ISO Shares Total
Total Shares 9,000 5,000 14,000
Regular Cost Basis 9,000 at $20.00/share 1,000 at $20/share

4,000 at $0/share

 14,000
AMT Cost Basis $180,000 5,000 at $50/share

After the swap, you retain 9,000 long-only shares with a cost basis of $20/share. You also have 1,000 shares from the exercise of the ISO with a carry-over cost basis of $20 per share. These two are the same as what we saw in the example with NQSOs.

The remaining 4,000 shares here, however, have a cost basis of $0/share (which is different than in the NQSO example above).

It’s equally important to track the AMT basis. While the cost basis for calculating the regular tax is $0/share, the cost basis for calculating AMT is $50/share. This is because the entire bargain element is taxed when calculating the AMT.

Having two basis figures when exercising and holding ISOs is commonly known as a dual basis.

Stock Swaps for Other Share Types

The above illustrations cover what a stock swap may look like if you own long-only shares and use those shares for the swap. Typically, long-only shares are shares you purchased on the open market, acquired when your restricted stock units vested or obtained when you exercised non-qualified stock options.

The shares types above typically have a single cost basis that makes them look similar in terms of how they can be used to exercise your employee stock options and what the tax implications may be.

You can also use shares acquired from an employee stock purchase plan or from an exercise and hold of other incentive stock options grants to do a stock swap. However, the rules and taxability of which may become significantly more complicated.

This is because these shares often have different tax rules subject to holding period requirements. These requirements and subsequent tax rules can make using shares received through an ESPP and ISOs in a stock swap more complicated than other methods.

Stock Swap as an Exercise Strategy

A stock swap can be a useful strategy that allows you to do a tax-free swap of shares you own for employee stock option shares. That being said, remember that while the swap is tax-free, the exercise itself is not.

When doing a stock swap, you use the FMV of the existing shares to acquire ESO shares at their exercise cost. This typically results in you using some existing shares to acquire more — although your total control of company shares actually goes down.

If you want to limit your position in a stock, a stock swap may be a zero-cash-required way to exercise your ESOs and reduce your overall exposure to a single stock. If you want to maximize your concentrated position, you may want to pass on a stock swap and use cash to exercise your ESOs.

Either way, the experience, objectivity, and accountability a professional can offer may be a worthwhile cost if you need help determining whether a stock swap is right for you.

The content herein is for illustrative purposes only and does not attempt to predict actual results of any particular investment.   Diversification does not guarantee a profit or protect against a loss.  None of the information in this document should be considered as tax advice.  You should consult your tax advisor for information concerning your individual situation.  Tax services are not offered through, or supervised by, The Lincoln Investment Companies.

 

How Leverage May Impact the Value of Your Employee Stock Options

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If you are on the receiving end of employee stock options, you might want to understand the concept of leverage, as it may have a meaningful impact on the future value of your stock. As it relates to employee stock options, leverage is illustrated by the percentage change you see in the total value of your employee stock options as a result of a change in the value of the underlying stock price itself.

If the percentage change in the value of your employee stock options is greater than the percentage change of the stock price, you have leverage.

With employee stock options, you likely can’t eliminate the issue of leverage altogether as it is inherent. You can however, begin to understand leverage by knowing how, when, and by how much it may impact the value of your employee stock options.  This can arm you with the information you need to make appropriate decisions on what to do next.

Let’s take a deeper dive to see the impact of leverage under different scenarios.

The Impact of Leverage on Employee Stock Options

To illustrate leverage, let’s assume that you have 10,000 employee stock options with an exercise price of $10 per share and a current market price of $20 per share. The current value of your employee stock options is $100,000.

Value = Number of Shares * (Current Price – Exercise Price)

= 10,000 * (20 – 10)

=$100,000

Over time, the share price of your company stock will move as subject to the prevailing market price. It can go up or down over the short- and long-term.

What’s interesting, however, is that a percentage move in the price of the company stock may not equal the percentage move in the value of your employee stock options.

To illustrate, lets calculate the percentage change to the value of your employee stock options when the market price of the stock changes in 20% increments.

Stock Price % Change of Stock Value of Employee Stock Option Change in Employee Stock Option Value Change in Value
$16.00 -20% $60,000 $40,000 -40.00%
$20.00 0% $100,000 $0 0.00%
$24.00 20% $140.000 $40,000 40.00%
$28.80 20% $188,000 $48,000 34.28%
$34.56 20% $245,600 $57,600 30.64%

As the price of the stock moves by 20%, you can see the value of the employee stock options increases (or decreases) by more than 20%. When the stock price increases from $20 to $24 per share, a 20% increase, the value of the employee stock options increases from $100,000 to $140,000, or 40%.

A 20% increase in the stock price means a 40% increase in the value of your options. This is leverage at work in your favor.

An Example of Non-Employee Stock Option Stock

For comparison, let’s assume that in lieu of owning employee stock options, you own the company stock outright. Specifically, you own the following:

  • Shares of Stock: 10,000
  • Current Market Price: $20/share

Stock owned outright may be the result of stock purchased through an online brokerage account, shares you obtained through an ESPP, or via vesting restricted stock units. Regardless of how it was acquired, it will act the same, as in there will be no leverage.  Lets illustrate:

Assume the same market movement of 20% in the value of the stock price, as illustrated in the chart below.

Stock Price % Change of Stock Total Shares Current Value Change in Value of Shares Increase in Value
$16.00 -20% 10,000 $160,000 $40,000 -20.00%
$20.00 0% 10,000 $200,000 $0 0.00%
$24.00 20% 10,000 $240,000 $40,000 20.00%

A 20% change in the stock price means a corresponding 20% change in the value of your stock. Considering the percentage change of the stock price equals the percentage change in your total value, we can see that no leverage is present:

The chart further illustrates the math (and the point) that a percentage change in the price of the stock equals the percentage change in the value.

This tells us that stock you purchased outright, ESPP shares, and vested restricted stock units do not have leverage. The percentage change you see in the stock price will equal the change you see in the value of your account.

Is Leverage on Employee Stock Options a Good Thing or Bad Thing?

When viewed through the lens of an increasing stock price, leverage can be seen as a good thing. As the stock price goes up, the value of your stock options goes up by even more (as determined by a percentage increase).

However, there’s a flipside. The same leverage means a greater loss when the stock price goes down. As illustrated in the chart above, a 20% price drop means a 40% loss in value.

This shared risk-reward tradeoff is typical of owning a single stock, and it’s only heightened when you introduce employee stock option leverage.

Whether this is good or bad is often a personal decision about your appetite for risk and acceptance (or avoidance) or volatility.

How the Spread Between the Exercise Price and Current Price Impacts Leverage

If we continue the chart above and illustrate the impact of leverage as the difference between the exercise price and the current market price increases, we can see that the percentage change in value of the employee stock options gets closer to the percentage change in stock price as the spread gets bigger.

For example, when the stock price moves from $103.20 per share to $123.83 per share, a 20% increase, the change in the value of the employee stock options is 22%. Leverage, as the difference between the exercise price and the current fair market value gets bigger, has less of an impact on the total value of the employee stock options.

Stock Price % Change of Stock Value of Employee Stock Option Change in Employee Stock Option Value Change in Value
$16.00 -20% $60,000 $40,000 -40.00%
$20.00 0% $100,000 $0 0.00%
$24.00 20% $140.000 $40,000 40.00%
$28.80 20% $188,000 $48,000 34.28%
$34.56 20% $245,600 $57,600 30.64%
$41.47 20%  $314,720  $69,120 28.14%
$49.77 20%  $397,664  $82,944 26.35%
$59.72 20%  $497,197  $99,533 25.03%
$71.66 20%  $616,636  $119,439 24.02%
$86.00 20%  $759,963  $143,327 23.24%
$103.20 20%  $931,956  $171,993 22.63%
$123.83 20%  $1,138,347  $206,391 22.15%

As leverage decreases, your employee stock options look more and more like stock you own outright. This may be an indication that employee stock options with low leverage are ripe for exercise.

 What Leverage on Employee Stock Options Means for Reaching Your Financial Planning Goals

 Leverage can have a material impact on when and how you reach your goals.  For example, assume that you $1,000,000 of value in your employee stock options and that’s made up of the following:

Exercise Price Current Stock Price Total Shares Current Value
$10.00 $20.00 100,000 $1,000,000

If your goal is to reach $2,000,000 of value, you might think you need the stock price to double, going from $20.00 per share to $40.00 per share.  Leverage, however, illustrates a different story:

Exercise Price Current Stock Price Total Shares Current Value
$10.00 $40.00 100,000 $3,000,000

In fact, when the current stock price doubles, the value of your options increases by 3 times.

We can calculate that in order for you to reach your goal of $2,000,000, the stock price only needs to reach $30 per share, or an increase of 50%.

Exercise Price Current Stock Price Total Shares Current Value
$10.00 $30.00 100,000 $2,000,000

What Leverage Means for Exercising your Employee Stock Options

If you like the idea of leverage and can stomach volatility in the value of your employee stock, it may be reasonable to retain your shares and assume the risk.

However, the potential positive impact leverage may have on the value of your employee stock options may reach a point where you can achieve a similar outcome by simply buying the stock outright.

Said another way, once leverage has maxed out, is your employee stock option providing as much value as it once did?

If you find that you are nearing expiration, leverage is low, and that you are ready to face the tax man, it may be time to consider exercising your options.

As always, the answer to this question should be considered in the context of which type of stock option you have (incentive stock options or non-qualified stock options) and what you are trying to achieve with your overall financial plan.

The content herein is for illustrative purposes only and does not attempt to predict actual results of any particular investment. Diversification does not guarantee a profit or protect against a loss.  None of the information in this document should be considered as tax advice.  You should consult your tax advisor for information concerning your individual situation.  Tax services are not offered through, or supervised by, The Lincoln Investment Companies.

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