Daniel Zajac, CFP®

Incentive Stock Options and Executive Compensation

non qualified stock options

What Are Some of The Advantages of Employee Stock Options

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Employee stock options are a powerful tool for businesses to provide an incentive for key employees and those who contribute to a company’s success. Stock options give you the right to purchase shares of stock at a predetermined price within a certain period of time through a vehicle called a stock option grant.  

 

If the stock price increases above the exercise price of the stock options, the price you can buy your shares, you can profit when you exercise your option and sell your shares. 

 

This optionality has the potential to be a lucrative source of compensation and an important topic to understand more fully.

 

What are the Two Types of Stock Options?

 

There are two types of stock options– incentive stock options (ISOs) and non-qualified stock options (NQSOs). Both types can help create a sense of ownership and commitment to the company, which can help both the company and the recipient. While similar, there are some notable differences between the two. 

 

Incentive stock options can only be awarded to employees and only up to certain limits. They have the advantage of potentially preferential tax treatment should you meet certain holding period requirements.

 

Non-qualified stock options have the unique advantage of being able to be awarded to both employees and non-employees. This allows a company to compensate directors, contractors, suppliers, consultants, lawyers, and others for services rendered or as recognition for their dedication to the company.

 

There are several key terms of incentive and non-qualified stock option that are helpful to know:

  •  Grant date: the date when you are given the option to buy the stock.
  • Exercise price: the price at which you can exercise your option and buy the stock.
  • Expiration date: the latest date when you can exercise your options from the option grant. If you don’t exercise the options by that date, they “expire” and are no longer valid.
  • Vesting Schedule: this schedule details when you obtain the right to sell your shares and how fast you can do so. In most cases, until the shares are vested, you cannot exercise your right to buy them.
  • Bargain element:  sometimes called the “compensation element”, this is the profit you make on the exercise of the options, determined by the difference between the option’s exercise price and the current market price of the stock when you exercise the stock options. 

The type of employee stock option you have determines how the bargain element may be taxed when you exercise your stock options. If you have non-qualified stock options, the bargain element is typically taxed as ordinary income, similar to your regular wage income. 

 

If you have incentive stock options, the bargain element may be taxed several ways depending on the timing of when you exercise your option and when you sell your shares. If you have incentive stock options, you may also need to address the Alternative Minimum Tax (AMT). 

 

The potential tax benefit of an incentive stock option can be seen as an advantage ISOs have over non-qualified stock options. However, both types have several common advantages over other equity types that show how powerful and lucrative they may be as a compensation tool.

 

Advantage 1. You Have Control Regarding When to Exercise Your Stock Options

 

As mentioned, you receive employee stock options through a stock option grant that gives you the right to purchase a certain number of shares at a predetermined price. In some cases, you cannot immediately exercise the stock option once you receive it. 

 

The timing of when you can exercise and sell or exercise and hold your options is typically based on what’s called the “vesting schedule.” 

 

Until your shares vest, you cannot sell your shares. Once they do vest, however, you can act upon your ability to exercise and sell the shares, if you wish. If you want to sell your shares, you’ll want to be aware that you are not in a “blackout period” that may limit your ability to sell your shares. If you are subject to a blackout period, you’ll likely need to wait until an “open-window” to sell your shares.

 

Alternatively, if you believe the company’s stock will continue to rise, you can hold the options and exercise them at a later date. As long as the current stock price is higher than the option price, there is a potential to profit. 

 

Either way, an advantage of a stock option over some other types of equity compensation is that you have control regarding the exercise of your option shares. Control may help you manage income tax, investment risk, and other financial planning goals and objectives.

 

Advantage 2. You May Not Need Any Cash to Exercise Your Shares

 

When you exercise your stock options, you have to purchase the stock at the exercise price of the option. Once exercised, you can either keep the shares or sell them and benefit from the proceeds of the transaction.

 

An attractive feature of employee stock options is that there may be a way to exercise your options that do not require any out-of-pocket expenses. Some of these no out of pocket exercise strategies are a sell-to-cover and a same-day sale. 

 

Let’s explore these and other methods for exercise your options:

  • First, you may consider a cash exercise. With a cash exercise, you use your cash to buy the shares at the exercise price, then recoup your cash outlay when you sell your shares (assuming you sell the shares for a price that exceeds your exercise price).
  • If you aren’t in a position to use cash, you can use a sell-to-cover, method. Most times, this process is conducted through a brokerage firm. With a sell-to-cover, the firm covers the cost of exercising the stock options by immediately selling the set number of shares required to cover the cost of purchase (and possibly income tax). After completing the sell to cover, you are left owning a share amount equal to the full amount exercised less the shares sold to cover the expenses.
  • Share withholding looks and feels similar to a sell-to-cover. The difference is that in lieu of using a brokerage firm to sell shares, your company will withhold the requisite shares to cover the cost, depositing the remainder into your investment account.
  • A same day sale is one that exercises the option and sells all the shares on the same day. The difference between the exercise price of the option and the final sales price is the profit and is commonly deposited into your brokerage account. 
  • Finally, there is the stock swap method, for use if you already own shares of the company stock. You can transfer enough stock to the brokerage firm to cover the cost of the options, and they will use the value of those shares to exercise the option.

 If you implement a sell-to-cover, share withholding, a same day sale, or a stock swap to exercise your employee stock options, it’s possible that you will not need to bring any cash to the table. This flexibility is attractive for someone who may not have adequate cash on hand or may not want to use that cash to buy shares of stock.  

 

Advantage 3. You Get to Participate in the Potential Upside of the Company

 

Employee stock options can provide a quality source of income in addition to cash compensation. If a company prospers and the stock price rises, you share in the company’s success, and your hard work is rewarded in a tangible way. For both employees and non-employees, this is a particularly powerful compensation tool.

 

One main advantage of employee stock options is the potential for upside on an appreciating stock price with no added cost. As a recipient of options, you have not paid for the shares. You were given them as part of a compensation package. 

 

Because you did not pay for options and you can benefit from an appreciating stock price, there is an argument that there is no risk to you from a financial standpoint. The higher the growth of the stock price, the more your ability to leverage the stock option for a more significant wealth generation.

 

However, this upside potential should continue to be managed as part of a financial plan. As the stock price increases above the exercise price, you’ll likely want to review your stock options planning and decide if and when it may make sense to exercise and sell some of your shares. Just as a stock price can increase and generate wealth, the stock price can also go down and decrease wealth too. 

 

Advantage 4. Some or All of the Taxes May Be Taken Care of For You

 

If you have non-qualified stock options, the bargain element is typically reported on your form W-2 at year-end (for employees). In many cases, income tax is withheld when you exercise your options via a sell-to-cover or a same day sale. This withholding feature is a convenient way to process a tax payment to the US government. However, it’s important to know that the amount withheld at exercise may or may not be enough to cover your entire tax liability, and you might want to consider additional tax planning.

 

If you have incentive stock options, income tax is not withheld when you exercise your option nor when you sell your shares. This non-withholding puts more of the onus on the taxpayer to plan for a pending tax bill. Therefore, prior to acting on your incentive stock options, you may want to plan for what type of tax you may owe, how big you expect that tax bill to be, and where that money will come from.  

 

There are many advantages to incentive and non-qualified stock options for both individuals and companies. Because of the complexities of managing employee stock option programs, as well as the various tax implications for option recipients, it’s important to work with a professional to maximize your return and take full advantage of this powerful compensation tool. 

 

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.

Understanding the 83(b) Election for Non-Qualified Stock Options

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If you have non-qualified stock options, you’ve likely spent time researching when and how you’ll face taxes for them. As a general rule, you will be subject to ordinary income tax on the profit you make when you exercise non-qualified options.

Being taxed when you exercise non-qualified stock options, or NQSOs, is attractive for a few reasons. For one, you control when your options become taxable. You may also enjoy more clarity as to what options are being exercised and what the value of those options will be. This means you can better estimate the tax impact you’ll face when you exercise (which is helpful for planning purposes).

Another benefit to non qualified stock options is the ability to sell exercised shares immediately via a cashless exercise. If you go this route, you turn the of the stock options into actual cash you can use.

Finally, you also have potential to use an 83(b) election with NQSOs. Here’s what you need to know about this option and why you might want to consider it.

Understanding 83(b) Elections for Non-Qualified Stock Options

The first thing you’ll want to do is confirm whether or not you can opt for an 83(b) election. You can likely check your company plan document to confirm whether this is available to you.

If allowed, an 83(b) election of non-qualified stock options allows you to exercise and pay tax on your pre-vested NQSOs. When you exercise your NQSO, you’re taxed on the spread between the exercise price of the NQSO and the price at exercise at that time. Since the shares are pre-vested, it’s possible that the spread between these two figures is smaller than it will be later.

The goal of using an 83(b) election is to turn what may be future price appreciation that would normally be taxed at ordinary income tax rates into a long-term capital gain. Using a simple assumption for tax rates, this could mean transferring income that might otherwise be taxed at 33% and, through the election, getting a better rate of 20%.

Of course, you need to discuss your specific situation with your accountant to evaluate the exact tax rates under each condition to determine if an 83(b) election would make sense for you or not. But in the meantime, we can get a better idea of whether an 83(b) election is something to consider by taking some time to look more at normal taxation of NQSOs.

How a Non-Qualified Stock Option Is Normally Taxed

If you have non-qualified stock options, you will generally pay ordinary income tax on the difference between the fair market value of the stock and your exercise price, multiplied by the number of shares exercised. (This is commonly referred to as the bargain element.)

The bargain element generally appears on your W-2 (for employees) in the year of exercise and is subject to Social Security and Medicare wage taxes. This amount is taxable whether or not you hold the shares post-exercise, or if you sell some or all of your shares right away.

The fair market value when you exercise helps establish your cost basis in the stock. Your cost basis is what you paid for the stock, and future gain or loss calculated from the cost basis will be subject to the rules for capital gains tax.

If the stock is held for one year or less and then sold, gain or loss from the cost basis at exercise will be a short-term capital gain or loss. If the stock is held for longer than one year, the gain (if any) will be subject to potentially preferential long-term capital gains treatment.

Using an example to illustrate, let’s assume we have the following scenario:

  • 10,000 NQSOs
  • Exercise Price: $1.00
  • Share Price at Vest: $30
  • Share Price at Exercise: $50
  • Final Sale Price: $50

Gernallyt speaking, you do not owe taxes when your non-qualified stock options are granted and you do not owe tax when they vest. Even though you don’t have to pay taxes yet, you may have NQSOs with considerable value.

The value of the options when the shares vest in this example is equal to the following:

(Fair Market Value at Vest – Exercise Price) * Number of Shares Exercised

($30 – $1) * 10,000 = $290,000

By continuing to hold the shares after they vest, you bypass the opportunity to “cash in” on this potential profit via an exercise and sell (but you also don’t have to pay any taxes yet).

Eventually, assuming the options are in the money, you will likely exercise your options, realize the value, and potentially capture a profit. When you do exercise, you’ll create a reportable tax event and possibly owe tax. In our example, the taxable income is equal to:

(Fair Market Value at Exercise – Exercise Price) * Number of Shares Exercised

($50 – $1) * 10,000 = $490,000

Usually, deferring taxes is a good thing — but if you hold an appreciating stock, waiting to exercise non-qualified stock options likely means paying more in tax than had you exercised the shares early and held them.

Going back to our example above, if we assume a flat 33% tax rate on ordinary income, we can calculate the total tax due in this transaction is $490,000 x 33%, or $161,700.

How an 83(b) Election May Impacts Tax on Non-Qualified Stock Options

Because of the potential tax liability associated with an exercise of a non-qualified stock option connected to an appreciating stock, it’s not uncommon to wonder how you may be able to minimize the pending tax bill. That brings us back to the 83(b) election.

As previously stated, non-qualified stock options are typically taxable in the year you exercise them. This means that during the time between when the shares are granted, when they vest, and immediately prior to when they are exercised, no tax is due.

With an 83(b) election, you may choose to exercise your non-qualified stock options and pay income taxes prior to the option vesting, in what is commonly referred to as an early-exercise. One reason to choose this route is that you hope for the spread between the exercise price and the fair market value to be lower now than it will be later.

Following the example from above, let’s assume you elect an 83(b). Let’s further assume the following scenario:

  • 10,000 NQSOS
  • Exercise Price: $1.00
  • Share Price at Exercise with 83(b): $2.00
  • Share Price at Vest: $30
  • Final Sale Price: $50

Assuming you exercise your options, elect 83(b), and file the requisite documents, you will be taxed on the spread at exercise. The spread, or bargain element, is equal to:

(Fair Market Value at Exercise – Exercise Price) * Number of Shares Exercised

($2 – $1) * 10,000 = $10,000

In this example, you report $10,000 of ordinary income in the year of exercise. When the shares are sold in a final sale, $480,000 will be taxed as a capital gain. Assuming long term capital gain rates of 20%, the total tax due will be $480,000 x 20% = $96,000.

If we compare not taking an 83(b) election to using it in our two examples, no 83(b) election leads to a tax bill of $161,700 and an 83(b) election leads to $96,000 in taxes.

The Risks of an 83(b) Election

That doesn’t mean an 83(b) election will always work out in your favor this way. The idea of paying less taxes is nice, but using the election is not without risks.

When you exercise early using an 83(b) election, you buy shares of stock that haven’t vested, and that you do not currently own or have rights to. To obtain those rights, you need to meet the requisite vesting schedule and/or requirements.

If you leave the company before the shares vest, it means you paid for something that you never received. To make matters potentially worse, it’s possible that if you had paid tax on the bargain element when you exercised, you may have also paid more in taxes than you otherwise would have needed to.

You also assume that the risk that the stock price does not increase in value. An 83(b) election can be a great tool if the stock appreciates, but there is certainly no guarantee of this happening.

If the stock price goes down after you exercise the option, you may find yourself having paid more in taxes than had you not exercised early, or find yourself paying for the shares at a higher price than what you otherwise would have needed to. Either way, you face a potential loss.

Determining Whether to Take an 83(b) Election with Your Non-Qualified Stock Options

An 83(b) election may be an option if you are granted non-qualified stock options. The chance to pay a lower capital gains tax rate as compared to ordinary income may make an 83(b) election worth exploring.

But it’s not a risk-free proposition. You may find yourself paying more in taxes or more for the stock should the stock price not go up in value, or should you leave your company prior to receiving your stock.

Just like any other financial planning decision you make in regards to your equity compensation and employee stock options, an 83(b) election for NQSOs should be evaluated as part of a larger plan. That plan should not only evaluate the tax impact of your decision, but evaluates your overall goals, objectives, cash flows, and long-term financial plan to help determine the best path forward.

The content herein is for illustrative purposes only and does not attempt to predict actual results of any particular investment.   All investments are subject to risk, including the risk of principal loss.  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.

The information in these articles may change at any time and without notice.  Laws of a specific state or laws relevant to a specific situation may affect the applicability, accuracy, or completeness of this information. The information presented here is not specific to any individual’s personal circumstances. There is no guarantee that any strategies discussed will result in a positive outcome.  The purchase of certain securities may be required to effect some of the strategies.

You should discuss any legal, tax or financial matters with the appropriate professional. Nothing contained herein should be construed as a recommendation to buy or sell any securities. As with all investments, past performance is no guarantee of future results.

5 Basics I Wish Everyone Knew About Employee Stock Options

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There is no easy way around it, employee stock options are complicated.

And depending on the type of stock options you have, how many you have, other types of employee stock options you own — along with all your other specific financial planning needs — understanding what to do with your employee stock options can become even more difficult to figure out.

That’s the bad news. The good news is that with a little reading and some education on the must-know stuff, you can get yourself up to speed with the basics of employee stock options quickly.

That includes getting an introduction into what a stock option actually is, when you can do something with your options, what happens when you exercise an option, and how much your options are worth.

If you have a clearer understanding of these basics, you can begin to dive deeper into the world of stock option taxation, exercise strategies, and the ever-present beast that is income tax.

But for now, let’s stick to those basics and look at what you need to know to help successfully manage this kind of compensation.

Understand the Basics of How Employee Stock Options Work

An employee stock option is a right to purchase company stock at a predetermined price sometime in the future. It’s a right to purchase the stock, not an obligation to do so.

If the stock price appreciates above the price at which you can buy the stock, you win. If the stock price goes below the price at which you can buy the stock, you don’t necessarily lose because you’re not required to do anything.

Let’s assume that you work for company XYZ. And as part of your employment package, they offer you the following stock options):

  • Employee Stock Option:1,000 shares
  • Grant Price: $10

In this example, XYZ company gives you the right to buy up to 1,000 shares at $10 per share, regardless of the prevailing market price of those shares. This right has the potential to be very valuable.

We can illustrate the potential value of these stock options using a simple illustration that looks at employee stock options in both good and bad markets.  For a good market, we will assume a market value is $50 per share and for a bad market value we will assume $5 per share:

Shares Grant Price Future Share Price Value
Current Market Value 1,000 $10.00 $10.00 $0.00
Good Market Value 1,000 $10.00 $50.00 $40,000
Bad Market 1,000 $10.00 $5.00 ($5,000)

If the future stock price equals the grant price or is lower than the grant price (a bad market), your stock options have no current value. The value in the stock option  lies in the opportunity to profit if the stock price goes up in the future. If the stock price is greater than the grant price (a good market), your stock option has a current value.

In our example, you can buy shares of stock for $10 per share via the option. If the stock is currently priced at $50 per share, you can immediately turn around and sell that same exact stock for a $40 profit per share.

You also have the right to do this 1,000 times (1 time for each share). If you exercise and sell all your shares, the total value is $40,000 (which is the difference between the price you can buy the stock and the price you can immediately turn around and sell).

If the future market price is below the grant price, you would choose to do nothing. Why buy a stock at $10 per share via your option when you can buy it elsewhere for $5 per share?

This short example is a simple and watered-down version of how employee stock options work and how you may make money if you are lucky enough to own them. But it gets more complicated from here.

The Employee Stock Option Terms You Need to Know

When your employer issues your employee stock options, you should receive a document that details the specifics and rules around your options.

A few key items to focus on include:

  • Grant price (or strike price), which is the price at which you can purchase your company stock.
  • Number of shares, which represents the number of shares you can You can opt to buy less than this amount if you’d like, but you cannot buy more.
  • The vesting schedule, which lets you know when you can exercise your right to buy the stock. When your employer offers stock options, you must wait a certain amount of time before you can exercise your right to buy the shares. Often this period of time is a set number of years (known as a cliff schedule), or a certain percentage of the stock options over a certain number of years (known as a graded schedule).
  • The expiration date, which is typically set 10 years from the date the stock option was granted. The expiration date is the date at which you can no longer exercise your right to the option. Once this date passes, any unexercised shares go away.

A quick note on one of these terms: A vesting schedule is used by an employer to help keep you working for the company. They provide you a future right to something that may be valuable to incentivize you to stay to at least that point in the future.

If the stock option does have value, that value may keep you working at your company until you can take advantage of your stock option right. In addition, the opportunity to generate wealth via a stock price that goes up may keep you motivated along the way.

These four terms will provide you enough ammunition to know what you own, when you can use it, and when it goes away.

Beyond these key points, the documentation around your options should also spell out regarding what happens to your stock option if you terminate employment via death, disability, and retirement. Other details will cover what happens if you leave your company or if your company merges with another.

The Two Types of Employee Stock Options

Employee stock options are given in two forms:

  1. Incentive stock options
  2. Non-qualified stock options.

Generally speaking, they both have identical features as discussed above. However, incentive stock options and non-qualified stock options are materially different.

Incentive stock options (ISOs) are employee stock options that may allow for a potential tax advantage. Because of this advantage, they are often seen as superior to their non-qualified stock option cousins.

ISOs make it possible for any gain from the strike price, to exercise price, to the final sale price to be eligible for preferential long-term capital gains treatment. To achieve this preferential tax treatment, however, you might be subjected to alternative minimum tax and must meet various holding requirements.

Non-qualified stock options are much simpler. There is no alternative minimum tax, and no holding period requirements. The gain from the strike price to the exercise price is taxed as ordinary income, and flows directly through to your W2.

What Happens When You Exercise

If you have stock options that have value, that means the prevailing market price is above the strike price of the option. In this case, you’d likely exercise.

The decision to exercise your option can be for many reasons,

  • You need the money for retirement
  • You are forced to exercise, otherwise the stock option will expire
  • You feel as though the stock is at a good price and you want to sell
  • You have too much in one company stock and want to diversify
  • You have a big expense that you need to pay for

When you exercise your employee stock options, you will be subject to income tax. The amount of tax you pay and the type of tax depends on the type of options you own, but generally speaking you will be taxed on the difference between the strike price of the stock and the exercise price of the stock, multiplied by the number of shares you exercise. The calculation of this figure is known as the bargain element.

To actually exercise the stock options, there will likely be a formal process by which you notify your employer of your intention to exercise the shares, and they help you facilitate the process through a broker of the stock.

The decision to exercise your stock options is often one of particular importance and particular complexity because of the pending impact on your taxes, investments opportunities, and financial planning.

Tax matters because you may need to come up with cash to pay the pending tax bill, or strategize how to cover the tax bill via a cashless exercise. You may also want to strategize how to best minimize, defer, and/or delay the potential tax impact. Investments matter because you should consider your investment risk tolerance, your risk capacity, and the overall concentration of company stock on your investment portfolio.

And financial planning matters because you want to be sure the decisions you make regarding your stock options help you reach the goals and objectives of your financial plan.

For example, it’s important to note that exercising your stock options means that you buy shares of company stock. You take “paper value” and turn it into “actual value” of stock.

By owning stock, you are now subject to the ups and downs of stock market volatility. A good financial plan will consider whether you want to retain the stock, or sell the stock and do something else with the proceeds.

You Could Make a Lot of Money with Stock Options (But There’s No Guarantee)

 Think of a start-up company that gives you 100,000 company stock options with a strike price of $1 per share. At issue, they probably won’t be worth much. Imagine though, that the price of the stock goes from $1 per share to $100 per share.

If that happened, the value of the stock options would go from nothing to $9,900,000. This isn’t a common situation, but it’s certainly a possible outcome.

One of the great features of employee stock options is unlimited upside. If your company stock price continues to appreciate, so will the value of your stock options. But you should balance this upside with the other outcome, or the fact that the stock price can go down.

Say you have company stock options worth several millions of dollars, and you’re nearing retirement. Now imagine that your company reports bad earnings, or a new competitor comes on the market and steals all your clients, or the overall economy is down and with that comes your stock price.

These types of bad scenarios may drive your stock price so far down that it wipes out some or all of your value.

This conversation can be summed up with one conclusion: Be realistic in your thinking about the potential value of the company’s future stock price. While it’s common to have a lot of faith in the company you work for, it may be better to take some of your chips off the table rather than being all in, all the time.

You’ve Got Options: Now What?

Now that you have an understanding of the basics of stock options, you can begin to learn more beyond the fundamentals by reading other, more specific or advanced posts on my blog (or more blogs and books like it).

You could manage to plan for your financial future on your own if you want to take the DIY route — but know that there is a lot to learn and a lot of decisions you need to get absolutely right.

If you find that the complexity of stock options warrants a second opinion and/or professional input, you can feel free to reach out to me directly. For many, the resources of a professional may help them produce an ideal outcome that helps them manage tax, invest wisely, and reach financial goals and objectives.

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.  The material presented is provided for informational purposes only. Nothing contained herein should be construed as a recommendation to buy or sell any securities. Projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results.

What You Need to Know About Employee Stock Options

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Access to employee stock options represents an agreement between you and your employer that allows you to purchase a specified number of shares of the company’s stock at a fixed grant price for a specified period.

If the future stock price appreciates above the stated grant price (the price at which you can purchase the stock via your option), the stock options are “in the money.” This is where the agreement can offer a significant benefit: you can exercise your employee stock option, which means you buy shares of stock at a grant price that is lower than the current market price.

But if the current price of the stock falls below the grant price, the options are “out of money.” In this situation, you wouldn’t want to exercise your right to buy shares at your specific grant price. Why pay more for something than you need to?

A key feature of employee stock options is that they give you the right to exercise (or the right not to exercise) your option. There is no obligation to do so.

Should you decide to exercise your option, you know what you’ll pay to buy your shares versus what the current market value of the shares is, and therefore, what your profit will be.

In one way, an employee stock option offers you a “free” opportunity to participate in the growth of company stock without investing any of your own money.

The Key Stock Option Terms You Should Know

Before we continue, let’s first define some commonly used terms and concepts that are associated with stock options.

  • Grant Date – This is the day that you receive your stock options.
  • Grant Price – Also known as the strike price, the grant price is the price at which you can buy the shares of stock. Regardless of the future value of that particular stock, the option holder will have the right to buy the shares at the grant price rather than the current, actual price.
  • Vest Date – This is the day that you can exercise your right to buy the shares at the grant price. Before this day, you may not have the right to exercise your option to buy your shares.
  • Vesting Schedule – Incentive stock options are issued with a schedule that details when the options become vested. Working from the grant date, the vesting schedule will detail when some or all of your options vest.
  • Expiration Date – This is the last day that you can exercise your options. If you do not exercise them, the options expire regardless of whether there was value in them or not.
  • Bargain Element – This is the difference between the grant price and the exercise price. For incentive stock options, the bargain element may be an adjustment item for calculating AMT.
  • In the Money – A term used when the current market price of the stock exceeds the exercise price, this means that the holder of the option can buy something at a lower price than what they can sell it for.
  • Out of the Money – This is a term used when the current market price is below the exercise price. If it’s “out of the money,” the option has no current value.

Employee Stock Options a Chance to Participate

Again, you’re not required to exercise any of your employer stock options to buy shares. Also, you don’t have any out-of-pocket cost when your employer offers the stock option grant.

Because of this no-up-front-cost benefit, you could say employee stock options are a risk-free investment, one that may allow you the free upside of an appreciating stock price.

Let’s assume that your employer offered you 10,000 shares of XYZ stock with a grant price of $1.00 per share. In most cases,  no cash exchanges hands, and no tax consequences are triggered when your employer provides these options.

Over time, the prevailing stock price will move with the markets. Should the market price of the stock fall below $1.00 per share, you wouldn’t exercise the option to buy your shares. Why pay $1.00 for a share of stock when you can go buy it somewhere else for less?

If your options remained “out of the money,” then you’d probably do nothing and let your stock options expire on the expiration date since they have no value.

But what if the market value appreciates to $50 per share? You could then exercise the option to buy shares of stock at $1.00 per share and sell them immediately for $50 at a gain of $49 per share.

Multiply $49 by 10,000 shares, and you could enjoy a gain of $490,000.

That’s what we mean when saying options can work like a risk-free investment. Even if the share price drops, you’re not obligated to buy – so you don’t lose money in this situation. And because there’s no cost to you to hold your options, it’s a bit like unlimited upside if the share price rises.

Know What You Hold: Incentive Stock Option and Non-Qualified Stock Option?

Employee stock options are divided into two distinct types: non-qualified stock options and incentive stock options.

Both types of stock options offer a chance to participate in the company stock price. Each also affords you the control over when to exercise (or whether you exercise at all).

Despite those similarities, many people feel incentive stock options (ISOs) are the better of the two options thanks to their potentially preferential tax treatment.

Here are two major, distinct tax features of ISOs and NQSOs:

  1. When you exercise non-qualified options (or NQSOs), the difference between the fair market value at exercise and the grant price is included as ordinary income (and therefore taxed at your marginal tax rate) in the year of exercise, regardless of whether or not you exercise and sell or exercise and hold.  When you exercise your ISOs, the tax reporting depends on what you do next.  If you hold the shares past the end of the calendar year (as opposed to exercising your options and selling the shares right away), you don’t report earned income in the year of exercise.  If you exercise and sell, you do need to report the ordinary income, similar to what you do with NQSOs.
  2. When you exercise and sell incentive stock options as a qualifying disposition (more on this below), the entire realized gain—from the grant price to the final sales price—may be taxed at preferential long-term capital gains rates. With a non-qualified stock option, the only additional gain from the exercise price to the final sales price is subject to potentially preferential capital gains treatment.

These tax rules of ISOs are typically advantageous because you may pay a lower tax rate on the realized gain of incentive stock options than you will the realized gain of non-qualified stock options, all else being equal.

However, incentive stock options come with the added complexity of the tentative minimum tax and the alternative minimum tax (AMT). In addition to your regular tax calculation, the tentative minimum tax is a tax calculation that takes place each year you file a tax return. As a taxpayer, you owe the IRS the higher of either your regular tax or the tentative minimum tax.

Generally speaking, if the tentative minimum tax is the higher of the two, you will need to pay the tentative minimum tax. Specifically, the difference between the regular tax and the tentative minimum tax is known as the AMT.

AMT and the tentative minimum tax may be an extremely important part of any incentive stock option exercise, because the exercise of incentive stock options often causes the tentative minimum tax calculation to be the higher of the two.

In fact, it’s possible that the exercise of incentive stock options can lead to the tentative minimum tax being so much higher that finding the cash to pay the pending tax bill will be a significant concern.

When Should You Sell Your Employee Stock Options?

While it’s possible to argue that the $490,000 gain we looked at in our example earlier was risk-free, you could just as easily make a case for employee stock options being high risk (since you could miss the opportunity to create serious wealth).

 

Why? Because your newly-generated wealth is subject to change as the stock price changes. If you exercise and hold, you could wind up with shares less valuable than what you paid for them. Or, if the stock price drops back down to $1 per share before you exercise and and sell your option, the $490,000 potential value that existed before you chose to act could be wiped out.

Because of these risks, it’s important to consider what strategies you may have at your disposal to exercise your options. Once you have vested shares available to exercise, you will most likely want to choose one of the following (but keep in mind, this is only a sampling of possible ideas to handle your stock options):

  1. The Do-Nothing Strategy (Continue to Hold the Options) – Doing nothing means risking that the stock price may change and impact the value of the options. In effect, doing nothing is an active decision to retain investment risk and concentration risk of owning a single stock position.
  2. The Diversify Strategy (Exercise and Sell) – In effect, this captures the value created by the option and turns it into money you can actually use. This strategy is intended to transfer stock option wealth into cash. That cash can then be used for other consumption (i.e., buying stuff) or funding saving goals.
  3. The Tax Planning/Investment Planning Strategy (Exercise and Hold) – In addition to purchasing the shares and paying the AMT, both of which may require a significant outlay of cash, this strategy may have you exercise and/or sell some or all of the shares in an effort to obtain preferential tax treatment and/or with hopes that the stock will appreciate.

Holding in the money options when you can exercise and sell them is an active decision to retain single stock risk. As the value of a high-risk single stock position increases and becomes a more significant part of your overall portfolio, or as it becomes more critical to the success of your financial plan, the risk of retaining the stock options also increases.

Therefore, a plan to exercise and/or sell should be something that is considered as part of a sound financial plan because it can be lower risk and provide an instant profit for in the money options.

Evaluating the Value of Your Employee Stock Options

In its simplest terms, the value can be calculated as the fair market value of the stock less the grant price multiplied by the number of shares. Using our example above, each share has a value of $49, which is the difference between the current market value and the grant price.

A small next step might be to separate the above-calculated value into vested stock option and unvested stock options. Vested stock options would be the options that you may be able to exercise and sell now. Unvested options, even if they are in-the-money, likely cannot be sold.

Before exercising and subsequently selling your options and stock shares, the value is simply “paper value.” Paper value is value that can change either positively or negatively with the changes in the stock price.

In addition to the current “paper value,” employee stock option value can be calculated using more complex formulas that consider the price volatility of the stock and/or the amount of time until the expiration of the option.

If we assume a stock with high price volatility, it would be reasonable to consider a broader range of projected outcomes and a greater range of potential future value.

It’s also reasonable to assume that stock options with a longer time before expiration may lead to more significant price variability, all else being equal. Short time horizons (options nearing exercise) have less time for price variability and are therefore generally more accurately valued in terms of current and future value.

Eventually, an informed stock option holder will likley exercise “in the money” shares. Assuming an exercise and hold, the value remains as paper value since it was purchased through the exercise but not sold. The held shares remain subject to continuing price volatility.

In one way, the value of exercised and held stock options may decrease. Why? Because you’ll likely need cash to buy the shares and to pay AMT.

It’s not until the exercised shares are sold that paper value becomes realized value. Value, after a final sale of stock and requisite taxes are paid, is after-tax value. After-tax value is the remaining amount available that you can use for consumption or investment.

A Word About Concentration Risk and Employee Stock Options

It’s worth taking a minute to discuss concentration risk. That’s the risk of having a significant portion of assets invested in one stock.

It’s not uncommon for an employee to receive stock option grants several times throughout their employment. As the number of grants get more significant, the frequency increases.

It’s possible for you to quickly amass an employer stock position that equates to a considerable percentage of your net worth — and end up with an undiversified portfolio that takes on more risk than necessary.

If you consult many of the financial planning handbooks out there, they will suggest that no more than 10%–15% of your net worth should be tied up in a single company stock. This rule of thumb is prudent advice — but it should be part of a larger discussion that takes the specifics of your financial situation into account.

In one sense, the risk of having all your eggs in one basket is a risk that not many would want to take. That wealth can easily be wiped out by a decreasing stock price. On the other hand, owning a large position in a rapidly appreciating stock can generate considerable wealth.

The right answer depends on the facts as pertains to your unique situation.

What’s Next for You If You Have Employee Stock Options?

Rules of thumb are useful guidelines, but that doesn’t mean there aren’t exceptions to them. For example, someone with a $50 million net worth may have a different take on concentration risk than someone with a $2 million net worth.

Once you identify your specific appetite for and ability to handle concentration risk, you can make plans to either eliminate, mitigate, or retain the single stock risk based on personal financial goals, time horizons, and objectives.

*Diversification does not guarantee a profit or protect against a loss.

Tax services are not offered through, or supervised by Lincoln Investment, or Capital Analysts.

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.

6 Strategies to Consider to Exercise Your Employee Stock Options

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The decision to exercise your employee stock options can be a difficult one, regardless of whether you have incentive stock options or non-qualified stock options.

You have to consider potential tax implications, whether or not you have the necessary cash flow to execute a chosen strategy, and of course, deal with the fear of making a “wrong” decision.

Although the tax situations with employee stock options may get complex, the thing that may trip most people up first is fear of missing out or getting it wrong. You may fear missing out on a rising stock price, for example, so you wait too long to exercise — and instead of rising, the stock price falls.

Or you might fear exercising your options because you want to be seen as a team player, so you don’t exercise or just hang onto the shares you buy when you should have sold immediately.

Whatever your fears, hesitations, or uncertainties, the bottom line is that if your employee stock options are worth something, you’ll want to exercise at some point.

With the proper planning, you may be able to identify a plan for you to act. The right strategies can also help address how to handle potential concentration risk, determine how your timeframe to retirement impacts your decision to exercise, and more.

Here are 6 of those strategies to consider so you make the right moves when it comes to the opportunity your stock options provide you:

Case 1 – Exercise and Sell Your Stock Options As Soon As Possible

The first opportunity you have to exercise your stock option(s) is when they vest. Prior to vesting, you can’t exercise. Unvested shares are simply a future promise of hopefully valuable stock options.

In the exercise and sell ASAP strategy, you exercise and sell your shares immediately when your options vest.

This strategy may be the best for someone whose goal is to convert “in the money” stock option value (or profit) into cash as soon as possible. You can then redeploy that cash into the market via a diversified portfolio, or you can use it for personal consumption (in other words, spend it on things you want or need, or use it to fund savings goals).

This strategy could also work for someone who is not interested in retaining company stock or not optimistic about the future stock price of the company.

Strategy 1 is the quickest way to turn employee stock option value into cash.

Case 2 – Wait Until Your Stock Options Are About to Expire

The other end of the stock option spectrum from Strategy 1, where you exercise and sell ASAP, is Strategy 2: wait as long as possible to exercise. “As long as possible” means right before your options are set to expire.

Employee’s stock options are issued with an expiration date. The expiration date is the final day you can exercise your stock options. Any “in the money” value in the option will be lost if you don’t exercise before the options expire.

This exercise option is often used by someone who simply hasn’t made a decision or felt afraid to act — and now they’re forced to act if they don’t want to lose the option.

Waiting so long to exercise means putting yourself at risk of simply forgetting about the expiration date, or missing your window of opportunity if the trade doesn’t go through in time.

Although it’s usually better to be proactive than reactive, some people may want to use this strategy if they’re highly confident the price will rise with time. Others make an intentional decision to defer the pending tax liability associated with an exercise of shares.  Whatever the reason, exercising at expiration is a now-or-never decision that is clear for any in the money options: exercise before you lose the opportunity to do so.

Case 3 – Exercise Your Employee Stock Options and Hold Shares

An “exercise and hold” strategy could describe anything that falls between “exercise and sell ASAP” and “wait until the bitter end.” In this strategy, you exercise your options — but you do not sell the stock.

Strategy 3 may be best for someone who is bullish on the stock price of the company (in other words, they think the stock price will continue to go up).

This strategy is often coupled with a tax strategy to hold the shares of stock after exercising the option (often for incentive stock options), a market timing decision, or a strategic financial planning decision.

Depending on the type of employee stock options you have (incentive stock options or non-qualified stock options), the tax and timing of an exercise and hold may have materially different outcomes. To know if Strategy 3 is right for you, you’ll likely need to do more comprehensive planning first to evaluate your specific circumstances.

Case 4 – Exercise and Sell As Your Concentrated Position Increases

You could be on the receiving end of additional employee stock options every year as part of a compensation package. In this situation, what started as a single stock position making up a small portion of your net worth can evolve into a position that represents a much bigger percentage of your wealth.

That may expose you to concentration risk*. Concentration risk is the risk of having too many eggs in one basket. Having one stock position take up too much of your overall investment portfolio can expose you to far more volatility than you want to deal with (or can handle).

The amount of concentration risk you assume depends on your financial situation, goals, and needs — as well as your age and time horizon to when you need to start tapping your nest egg.

For example, you may need to be more averse to concentration risk when you’re in your 50s and approaching retirement than you might need to be when your 30.

Imagine if you’re about to retire, and the value of your stock options drops by 50%.  This may be the difference between being able to quit working or not. But if you’re in your 30s and still working, you may be able to handle this drop with less impact.

Concentration risk may also be influenced by your net worth. Imagine you have $5,000,000 in one company stock in addition to $10,000,000 on the side.

You may be able to handle the concentration risk of a $5,000,000 stock position greater than someone who has “only” $2,000,000 but has it all tied up in the same stock.  One person has assets to fall back on.  The other, not so much.

Ultimately, concentration risk should be identified and addressed. If you realize (or already know) you are averse to this risk, the best choice may be to exercise and sell your stock options — then allocate the proceeds to a more suitable, more diversified investment portfolio.

Case 5 – Rolling Exercise and Sale of Employee Stock Options

This strategy is a bit like dollar-cost averaging. Dollar-cost averaging allows you to invest a certain amount of dollars on a set schedule over a period of time.

For example, think of your 401(k) retirement plan: contributions from your paycheck are the same each time and put into your account at regular intervals.

A benefit of the dollar-cost averaging approach is the ability to buy into the market at a variety of prices, which helps you avoid consistently buying at inopportune times (like when prices are high). Your average cost basis should be lower with dollar-cost averaging than it would be if you always tried to time the market instead.

You can try this same strategy with stock options. To do so, you could exercise X% of the options over X amount of years.

For example, let’s assume you have 50,000 stock options that are vested. A rolling exercise could require exercising 25% of the shares (or 12,500 shares) per year for the next four years (assuming the shares are “in the money”).

This rolling exercise creates a systematic process that allows you to participate in the upside and downside of the stock but also removes emotional decision-making that may force a bad decision during periods of market volatility or uncertainty.

Another advantage of Strategy 5? It could spread taxes owed over a series of years (instead of owing a massive amount all in one year). But as always, you should complete a detailed tax plan to understand what your tax implications may be.

Case 6 – Exercise and Sell When You Have “Enough”

When evaluating your stock options, it’s important to consider two values: the paper value and the after-tax value.

The paper value is often the value you see on an account statement. Paper value is the pre-tax value of your stock options based on a current per-share price. Often, the paper value includes the value of both vested and non-vested shares, so it’s important to separate the two.

Paper value often does not account for income tax owed upon exercise. What is left after you exercise and pay income tax is known as after-tax value.

After-tax value is a clearer representation of the actual dollars received should you exercise and sell your stock options. This is the amount you would have available to fund your lifestyle, to spend in retirement, or to save for another day.

A good time to exercise your stock options may be when this after-tax value is “enough.” What “enough” actually is will be a personal decision.

For you, enough may be the amount required to fund a comfortable retirement, pay for college, or buy a second home. For others, enough may be the amount required to generate generational wealth or leave a large legacy behind.

But once you have enough, is it worth taking the risk of losing it? Know your “enough,” and then act when your options allow you to achieve it.

Financial Planning for Employee Stock Options

No matter what your situation or your motivations for wanting to exercise, all of these strategies should be explored within the context of a full financial plan and retirement strategy.

While there is likely no right answer for everyone, each strategy above has its own advantages and disadvantages that should be considered prior to pulling any one trigger. What makes a strategy the “right” one depends on the specifics of your unique situation.

+A plan of regular investing does not assure a profit or protect against loss in a declining market.

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.

Exploring the Details of A Cash Exercise of Employee Stock Options

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When it’s time to exercise your employee stock options, you generally have one of two options to consider: you can do either a cash exercise, or a cashless exercise.

The right choice for your situation will depend on a number of factors specific to your finances, your goals, and your needs and challenges to address. But that being said, let’s assume that you’re interested in a cash exercise — and need to know all the details inherent in this option.

Here’s what you should consider.

Why You Might Choose a Cash Exercise of Employee Stock Options

You would likely choose a cash exercise if your goal is to maximize your position in company stock, with the hope that stock price goes up. A cash exercise might also make sense if you want potentially preferential long-term capital gains treatment on further appreciation of the stock.

It sounds like a no-brainer to choose a cash exercise when you consider this tax advantage, but there’s a reason it doesn’t make sense for everyone. If you choose a cash exercise of your stock options, you pay for the cost of the option shares with cash out of pocket.

It will also most likely result in a larger position in company stock as compared to what you would hold if you did a cashless exercise. While a larger holding in one stock can be a good thing, it can present specific risks that you may or may not be in a position to take.

There’s a lot of potential upside if the stock value rises; you’ll get the reward of a higher account value for assuming single stock risk in this case. But should the stock price drop, you’ll instead be punished for the concentration risk you took via a lower account value.

This risk-and-reward tradeoff is fundamental to all investing decisions. However, all else being equal, the risk you assume may be higher when choosing a cash exercise when compared to the risks presented by a cashless exercise.

To better evaluate if you can handle that risk or not, you should consider the actual cost of a cash exercise.

How to Pay for the Shares of a Cash Exercise of Employee Stock Options

In some scenarios, paying for a cash exercise of your employee stock options can be quite simple. If the cost to exercise is low or if you have cash on hand, you can use cash to pay for the cost of the exercise.

Here’s a quick example to show how you can calculate the cost of a specific cash exercise:

Number of Shares Exercise Price Current Price Market Value Value Less Cost
5,000 $1.00 $25.00 $125,000 $120,000

In the above scenario, the cash required to purchase the shares of stock is small. You would  only need to spend $5,000:

“Number of Shares” x “Exercise Price” = Cost of Exercise

5,000 x $1.00 = $5,000

Should you choose to use $5,000 to do a cash exercise, you immediately own 5,000 shares valued at $125,000. This is certainly not a bad deal and is easy to do because of the relatively small cash requirement.

(It should be noted that this example does not include the associated taxes due upon exercise. The tax costs will be dependent on the type of shares being issued. Whether you have incentive stock options or non-qualified stock options will impact the outcome here.)

But what happens if you need considerably more than $5,000 to perform your cash exercise? If you don’t have large amounts of cash available you might need to find an alternative funding source.

Let’s continue with our initial example, and now assume the exercise price changed from $1.00 to $20.00 per share. The impact of this change in exercise price substantially increases the cost of a cash exercise:

Number of Shares Exercise Price Current Price Market Value Value Less Cost
5,000 $20.00 $25.00 $125,000 $25,000

“Number of Shares” x “Exercise Price” = Cost of Exercise

5,000 x $20.00 = $100,000

While many people may have $5,000 in cash available to spend to perform a cash exercise when the exercise price is $1.00 per share, not as many will have $100,000 in cash (plus the taxes associated with the exercise) to use in this updated example with higher exercise price.

The issue isn’t just about the  cash, either. A bigger question should be asked as well: Would the same person who does have an extra $100,000 lying around want to take this cash cushion and use it to buy just one stock, or is there a better investment option available?

For those who don’t have the cash and wish to buy the stock via a cash exercise, you’re not completely out of luck. You may be able to take the following actions to generate the required cash:

  • Sell assets from a brokerage account
  • Borrow the money from a bank
  • Borrow from a friend/family member
  • Borrow using your house (home equity or otherwise)
  • Take a loan from a 401(k)
  • Use a margin account

As you can see, a number of options exist that could allow for a cash exercise. But if you ask me, none of these are particularly attractive.

That isn’t to say there isn’t a time and place for certain strategies, but all of the options above require you to take on an added level of risk.

Understand the Risks You Might Take to Generate Cash for a Cash Exercise

To better understand these potential risks of trying to use alternative funding sources if you don’t have cash on hand for a cash exercise, let’s keep on with our example.

Assume that you decide to borrow the $100,000 required to perform the exercise from a family member. Immediately following the exercise, you own 5,000 shares of stock at $25.00 per share, for a total value of $125,000.

If you take a snapshot of that scenario as soon as you complete your exercise, you could argue that this is a reasonable position to be in. You own shares worth $125,000 and you owe your family member $100,000, so you make a profit even after repaying your relatively.

As time passes, however, the value of the shares you own will fluctuate up or down. Most people who choose a cash exercise feel optimistic about the chances of the stock price going up — but what if things don’t go according to plan?

Imagine the price goes down by 20%, to $12.50 per share. As the price drops from $25.00 to $12.50 per share, the value of the shares drops from $125,000 to $62,500.

Number of Shares Share Price Market Value Debt Net Value
5,000 $25.00 $125,000 $100,000 $25,000
5,000 $12.50 $62,500 $100,000 ($37,500)

In this unfortunately situation, you still own stock shares — but they’re only worth $62,500, and you owe your family member $100,000. The leverage you used in borrowing money to buy shares left you in the unenviable position of owing more than the stock is worth.

This is an example of the additional risk you can take in trying to come up with alternative funding sources for cash exercises of stock options.

What If You Tried a Cashless Exercise Instead?

What if, instead of borrowing money to perform a cash exercise, you went with a cashless exercise instead? In that case, we could assume you did not take a loan from a family member to pay for the shares. Instead, you would use some of your shares to pay for the others (immediately exercising and selling enough to cover the cost).

Without getting too deep into the details, we can assume you need 3,000 shares to perform a cashless exercise. This means that you are left owning 2,000 shares. Even if the share price falls from $25 to $12.50 here, you’re not in such a bad position:

Number of Shares Share Price Market Value Debt Net Value
2,000 $25.00 $50,000 $0.00 $50,000
2,000 $12.50 $25,000 $0.00 $25,000

As the share price falls from $25.00 per share to $12.50 per share, the market value drops to $25,000. While this value is smaller than the $62,500 in the cash exercise, the cashless exercise also has no debt. Therefore, your net financial position is better in cashless exercise than a cash one.

Of course, there’s the flipside: taking on less risk means less potential reward. Should the stock price appreciate instead of drop, holding fewer shares means your total profit would be less than if you held more shares granted by a cash exercise.

You need to determine what kind of risk-reward tradeoffs make the most sense for you and your specific financial situation.

Is a Cash Exercise a Good Thing or Bad Thing?

A cash exercise will likely lead to owning more company stock than would otherwise be owned by implementing a cashless exercise. As we have illustrated, this concentration leaves you with more risk — but you are also in position to possibly reap a higher reward.

Again, the right decision on a cash exercise of stock options (versus a cashless one) is a person-to-person and situation-to-situation decision.

Are you someone who is interested in market volatility, concentration risk, and generating wealth through investments? Or are you interested in spreading risk, allocating assets, and paying down debt?

Furthermore, what other assets and income do you have and/or expect, and do you look at your company provided stock as simply another form of compensation?

The combination of these answers may lead to a suitable stock option plan that works for you and your financial goals.

There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The above hypothetical examples are for illustrative purposes only and do not attempt to predict actual results of any particular investment.

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