Employee Stock Options Dilemma

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Abciximab
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Employee Stock Options Dilemma

Post by Abciximab » Wed Jan 16, 2008 1:08 am

Every four years, the company I work for gives me the option to purchase 10% of my salary in stock. As part of this program I get 2 or 3 options (depending on how well the company does) for each share I purchase. I already know I'm going to participate, but I'm not sure what would be the best way to pay for this. I currently have about 7% of my total portfolio in this stock and regularly sell to avoid becoming undiversified.

I have two options:
1 - Pay cash for the investment (requires saving around $12,000 between now and December)
2 - Finance the purchase with a loan at a variable interest rate

I could save the money I need for an up-front purchase and park it in Prime Money Market for the time being, but I feel like I'm missing something by holding so much money in cash (I'd instead DCA into my taxable funds like always). At the same time, getting a loan makes me a little uncomfortable.

Has anyone on this board had a similar situation at work? Any suggestions?

Thanks...
An investment in knowledge always pays the best interest - Benjamin Franklin

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market timer
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Post by market timer » Wed Jan 16, 2008 7:36 am

So, you are forced to buy as a lump sum in December, but would rather DCA over the year? If so, my suggestion is to DCA into your company's stock throughout the year, then sell this position in December to fund your lump sum purchase.

Wagnerjb
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Post by Wagnerjb » Wed Jan 16, 2008 8:51 am

I could save the money I need for an up-front purchase and park it in Prime Money Market for the time being, but I feel like I'm missing something by holding so much money in cash (I'd instead DCA into my taxable funds like always). At the same time, getting a loan makes me a little uncomfortable.


Personally, I would avoid the loan if you don't truly need it. If you feel like your funds in a money market account are not being as productive as you would like, remember that you are getting a nice bargain when you buy the company stock. Market Timer has also offered another alternative - put the funds in the stock market (your stock or a mutual fund) in the meantime, but be prepared to have less than necessary if the market goes south.

Out of curiousity, are the stock options priced at the same price as the stock you buy? Do they have a reasonably long period before expiration? Are you including the value of your outstanding options in the 7% figure you quoted for exposure to company stock?

Best wishes.
Andy

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Abciximab
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Post by Abciximab » Thu Jan 17, 2008 2:25 am

Yes, the purchase price of the stock is not discounted. The options may be exercised after two years and expire in ten years. The 7% I mentioned is my current exposure to the stock.

I considered investing the money in VTSMX in the meantime, but like you said, it may lose money between now and then. I guess I'm also concerned about having so much exposure to one company's stock... it's Walgreens by the way. Perhaps I could sell my current shares at the time to cover the cost of the new shares. Sort of like a swap.

Thanks again for the help.
An investment in knowledge always pays the best interest - Benjamin Franklin

InertiaMan
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Post by InertiaMan » Thu Jan 17, 2008 8:58 am

I think your idea to sell the shares you are currently holding (from previous offering period) to raise case for the next offering peridod is the best way to handle the cash flow.

However, I'm missing the reason which is motivating you to participate in this program to begin with. You describe the plan as a stock purchase plane, but you also say the purchase price of the stock is not discounted. So what is the motivation? But you also refer to options and vesting periods ... which would imply stock options, not stock. ??

Wagnerjb
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Post by Wagnerjb » Thu Jan 17, 2008 9:12 am

InertiaMan wrote:However, I'm missing the reason which is motivating you to participate in this program to begin with. You describe the plan as a stock purchase plane, but you also say the purchase price of the stock is not discounted. So what is the motivation? But you also refer to options and vesting periods ... which would imply stock options, not stock. ??


The reason to buy the stock is because you also get a free option (several shares of options) with every purchase. The options have value and can be worth substantial amounts if Walgreens share price grows.

There is a slight "cost" to participating in the program, and that is the lack of diversification. But if one keeps the amount of Walgreens stock down to a manageable amount (10% might be my threshold), the cost is far outweighed by the potential benefits of the stock options IMO.

By the way, I also like the idea of selling some of the current shares to fund the purchase of the new shares!

Best wishes.
Andy

stan1
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Post by stan1 » Thu Jan 17, 2008 9:31 am

Wagnerjb wrote:By the way, I also like the idea of selling some of the current shares to fund the purchase of the new shares!



Agree, try to avoid wash sales if you have a loss (sell at least 31 days before) and try to go for long term if you have a capital gain (sell at least 366 days after you bought). I can see how this would work using a laddering technique so you would mostly have long term gains.

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foodnerd
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Post by foodnerd » Thu Jan 17, 2008 9:42 am

Your options are very different from mine. We get an allocated amount of options per year that begin to be "vested" in two years, but they vest over a four year period (25% per year). They are good for ten years from the option date. They also set the stock option price as the lowest price of the stock for that year. If and when we sell, we get the money back from the difference of the sale, minus taxes. No cost or upfront money.

So, are the dividends for your stocks reinvested for you to increase the amount of stock over time? It almost sounds like this is a stock purchase plan with some restrictions.

Just my thoughts.

FN

InertiaMan
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Post by InertiaMan » Thu Jan 17, 2008 8:30 pm

Wagnerjb wrote:The reason to buy the stock is because you also get a free option (several shares of options) with every purchase. The options have value and can be worth substantial amounts if Walgreens share price grows.


OK, now I get. Very different program than my company's option.

Given the structure of the program, I suggest you sell ALL the stock (not options but actual shares) when the next offering period begins. Use the cash to cover the payment for maxing out in the subsequent offering period. I wouldn't keep any shares other than those you are purchasing via the current offering period; the options represent a significant "allocation" to the Walgreens stock and it wouldn't be prudent to make an even larger allocation by holding onto any shares.

Your next dilemma is how to determine when to sell the options, which doesn't have such an obvious answer. Having made some mistakes with my own options, I suggest that you establish a semi-mechanical pattern of regular options executions once they begin to vest. I wish I had done that years ago.

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