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Wait. Why would you do this? Can't you hold your options as, well, options until you want to exercise and sell them? I don't get why you would convert options t

Wait. Why would you do this? Can't you hold your options as, well, options until you want to exercise and sell them? I don't get why you would convert options to stock unless you wanted to sell them right away. I'm sure I'm missing something. Thanks.

mp3tricord 15y ago
There are a couple reason you might exercise you options. First is that options come in two flavors ISO and NSO (or Non-Qualified). If you are issues ISO options then you could exercise and hold to qualify for long-term capital gains. http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/ http://www.startupcompanylawyer.com/2008/03/05/whats-the-dif... 2. Your options are going to expire and you need to convert them to shares. 3. You are leaving and want to hold on to your shares. Typically you need to convert them within 3 months.
bankim 15y ago
When one exercises options that starts holding period for capital gains...
- jpdoctor 15y ago
  During TechBubbleV1, many people got completely burned by AMT after exercise. Several were bankrupted because the stock deflated. Oh, and IRS bills are not dischargable in bankruptcy, so those poor bastards had their pay attached.
pfarrell 15y ago
I am having to get ramped up on this right now as my company is filing. I'm not 100% positive, but, I believe if you exercise and sell in a single transaction, you're going to get hit with ~40% short term capital gains tax. Holding the exercised stock for a year will reduce the tax hit at sell time to ~22% long term gains.
- jen_h 15y ago
  Yeah. The right time to exercise when a company is filing is like...a few years before, when the shares were pretty much imaginary and you weren't standing to be taxed for imaginary wealth (why I once agonized over buying 25 cent shares for 700 bucks in a company 4 years away from an IPO, I have no idea--it's either lost money or free cash. Assume it's lost money and you're either right or happily surprised a few years down the road; both aren't such bad outcomes). You've likely heard this, but one thing you might want to look at is a hybrid transaction (I think they call this a "cashless transaction"); exercise and sell enough to cover taxes and to purchase anything you've got available to exercise (to hold for another year).
  - mjs00 15y ago
    You may net less (or much less) a year from now waiting for long term federal tax rates vs selling now - if the stock price falls rather than remaining flat/rising.
    - pfarrell 15y ago
      I've come to the realization that you're right, jen_h and mjs00. I'll likely be doing the cashless transaction (if offered). Basically, I didn't play this one as well as I could have and am trying to find a way to recoup now. I think it's a bit late and I should take whatever's on the table when the lockout ends (assuming there's something left)
  - pfarrell 15y ago
    I'll be ready for that next time. I never had access to the cheap options (since I came to the company after they'd had series C funding.
- timr 15y ago
  long-term cap gains are 15%, not 22% -- until 2013. unless congress intervenes before then.
  - 15y ago
georgemcbay 15y ago
One situation where you would do this is if you are leaving the company. eg. spent 4 years there, fully vested, decide to leave for another opportunity. In most cases there is a very short (30 days is common, sometimes up to 90 days depending upon the options contract) window for you to exercise your options or you will lose them.

mp3tricord 15y ago

There are a couple reason you might exercise you options. First is that options come in two flavors ISO and NSO (or Non-Qualified). If you are issues ISO options then you could exercise and hold to qualify for long-term capital gains. http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/ http://www.startupcompanylawyer.com/2008/03/05/whats-the-dif... 2. Your options are going to expire and you need to convert them to shares. 3. You are leaving and want to hold on to your shares. Typically you need to convert them within 3 months.

bankim 15y ago

When one exercises options that starts holding period for capital gains...

jpdoctor 15y ago
During TechBubbleV1, many people got completely burned by AMT after exercise. Several were bankrupted because the stock deflated. Oh, and IRS bills are not dischargable in bankruptcy, so those poor bastards had their pay attached.

pfarrell 15y ago

I am having to get ramped up on this right now as my company is filing. I'm not 100% positive, but, I believe if you exercise and sell in a single transaction, you're going to get hit with ~40% short term capital gains tax. Holding the exercised stock for a year will reduce the tax hit at sell time to ~22% long term gains.

jen_h 15y ago
Yeah. The right time to exercise when a company is filing is like...a few years before, when the shares were pretty much imaginary and you weren't standing to be taxed for imaginary wealth (why I once agonized over buying 25 cent shares for 700 bucks in a company 4 years away from an IPO, I have no idea--it's either lost money or free cash. Assume it's lost money and you're either right or happily surprised a few years down the road; both aren't such bad outcomes). You've likely heard this, but one thing you might want to look at is a hybrid transaction (I think they call this a "cashless transaction"); exercise and sell enough to cover taxes and to purchase anything you've got available to exercise (to hold for another year).
- mjs00 15y ago
  You may net less (or much less) a year from now waiting for long term federal tax rates vs selling now - if the stock price falls rather than remaining flat/rising.
  - pfarrell 15y ago
    I've come to the realization that you're right, jen_h and mjs00. I'll likely be doing the cashless transaction (if offered). Basically, I didn't play this one as well as I could have and am trying to find a way to recoup now. I think it's a bit late and I should take whatever's on the table when the lockout ends (assuming there's something left)
- pfarrell 15y ago
  I'll be ready for that next time. I never had access to the cheap options (since I came to the company after they'd had series C funding.
timr 15y ago
long-term cap gains are 15%, not 22% -- until 2013. unless congress intervenes before then.
- 15y ago

georgemcbay 15y ago

One situation where you would do this is if you are leaving the company. eg. spent 4 years there, fully vested, decide to leave for another opportunity. In most cases there is a very short (30 days is common, sometimes up to 90 days depending upon the options contract) window for you to exercise your options or you will lose them.