please help me understand this stock award

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sunspotzsz
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please help me understand this stock award

Post by sunspotzsz » Fri Mar 27, 2015 9:53 am

I just got a new job and there is a stock option award with the offer. I don't really understand what it means. please help.


You will be nominated to receive a one-time new hire Non-Qualified Stock Option award with a target value of $80,000. This amount uses the Black-Scholes methodology for valuing stock options. Your actual award value and number of shares granted will depend on the market price of xxx stock on the date of grant. This award vests over four years at 25% per year, beginning one year after the date of grant. This award is subject to standard plan terms and provisions as described in the Stock Option Award Agreement and approval by our Internal Stock Committee.
xxx grants Long Term Incentive (LTI) awards on the first business day of each fiscal quarter following approval from the Internal Stock Committee. Your award will be granted at the earliest practical opportunity following your hire date. You should receive a notification of the grant within six months of your hire date.
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rob
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Re: please help me understand this stock award

Post by rob » Fri Mar 27, 2015 9:56 am

They are giving you an option to buy their stock at a set price in 4 installments. Hit fairmark.com and get the book consider your options as it's a great source for how to treat them and some strategies.
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knowledge
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Re: please help me understand this stock award

Post by knowledge » Fri Mar 27, 2015 10:06 am

They are giving you a stock option grant that vests evenly over 4 years, with a total target value of $80k. These options will have a strike price based upon the market price at the day of the grant. Given that they don't know what that price is, they can't tell you exactly how many options this will be, but you'll get them as soon as is reasonable post your start date.

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sunspotzsz
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Re: please help me understand this stock award

Post by sunspotzsz » Fri Mar 27, 2015 10:08 am

thanks!

let's see that I started job yesterday and the company is Cisco. How would i calculate the option?

thanks again!
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satch
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Re: please help me understand this stock award

Post by satch » Fri Mar 27, 2015 10:08 am

Sounds like on the date of grant you will get $80,000 valued option. So say the stock closes at $20 on the date of the grant. Your award would be 4,000 shares at a $20 strike price. Since these shares vest over annual periods, the first 1,000 shares (25% of the shares granted) would vest a year after the date of grant. Once those 1,000 are vested you could exercise your option on those 1,000 shares. The remaining 3,000 will vest annually going forward the same way. Make sure you keep track of your options as they will have an expiration date and you don't want in the money options to expire. Say after a year your company stock is trading at $60 a share. Those 1,000 options have a $60,000 value and you only have to pay $20,000 - many people would do a cashless exercise i.e. same day sale, so you exercise your options and sell them the same day, your company gets the 20,000 strike price and you get 40,000....less taxes, trading fees etc....

Go to mystockoptions.com they have all sorts of info on employee NQSO awards etc....

mak1277
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Re: please help me understand this stock award

Post by mak1277 » Fri Mar 27, 2015 10:09 am

knowledge wrote:They are giving you a stock option grant that vests evenly over 4 years, with a total target value of $80k. These options will have a strike price based upon the market price at the day of the grant. Given that they don't know what that price is, they can't tell you exactly how many options this will be, but you'll get them as soon as is reasonable post your start date.
This...and keep in mind that the $80k target is (relatively) meaningless for you. The Black-Scholes methodology is used to calculate the expense the company is going to record in its income statement over the vesting period of your options. It may or may not have any actual correlation with the value you receive.

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sunspotzsz
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Re: please help me understand this stock award

Post by sunspotzsz » Fri Mar 27, 2015 10:14 am

thanks a lot, guys.

so this kind of option is worth far less than the $80k they claim, right? the stock of the company has gone up a lot recently and i think the upside is limited.

if another offer with same base gives a $40k cash bonus, then the cash bonus is probably better, right?

thanks!
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mhc
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Re: please help me understand this stock award

Post by mhc » Fri Mar 27, 2015 10:21 am

satch wrote:Sounds like on the date of grant you will get $80,000 valued option. So say the stock closes at $20 on the date of the grant. Your award would be 4,000 shares at a $20 strike price. Since these shares vest over annual periods, the first 1,000 shares (25% of the shares granted) would vest a year after the date of grant. Once those 1,000 are vested you could exercise your option on those 1,000 shares. The remaining 3,000 will vest annually going forward the same way. Make sure you keep track of your options as they will have an expiration date and you don't want in the money options to expire. Say after a year your company stock is trading at $60 a share. Those 1,000 options have a $60,000 value and you only have to pay $20,000 - many people would do a cashless exercise i.e. same day sale, so you exercise your options and sell them the same day, your company gets the 20,000 strike price and you get 40,000....less taxes, trading fees etc....

Go to mystockoptions.com they have all sorts of info on employee NQSO awards etc....
I don't think this is correct. The OP says the Black-Scholes value is $80k not strike price times number of shares. On the grant date there will be an equivalent cost for buying the option. Let's say the option price was $10 share. You would then get 8000 options.

knowledge
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Re: please help me understand this stock award

Post by knowledge » Fri Mar 27, 2015 10:22 am

Actually reading the language again, the 4 year vesting may only start after one year of the grant, meaning it will take 5 full years to get the full grant, and two years to get 25%. I would clarify that with your HR rep.

Re: how to value this option for your purposes: Typically, stock option awards have a 10 year expiration, and the value primarily comes from the time element. That said, this all depends on multiple questions - how long you expect your tenure to be, if you're expecting further grants, your tax situation, etc.

I've had options that were worthless, came into the money, and then went back underwater, only to come out to be positive. I've had others that I've sold way too early. Generally, I don't consider it part of my portfolio, and certainly do not count on the monies until I exercise them. I generally don't mind the volatility associated with them.

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rob
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Re: please help me understand this stock award

Post by rob » Fri Mar 27, 2015 10:25 am

Keep in mind it MIGHT be worth nothing.... If the stock price in a year is below the strike price there is no point spending x to get x-y value. While many people do cashless excercise, there are other - pardon the pun - options. You MIGHT want to excercise and hold to get long-term cap gain tax... or you might not. Generally, it's good to hold options to close to the expiry date as it gives you the benefit of stock price increases without the risk since you don't carry the stock just the option to buy at a price in the past.
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mak1277
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Re: please help me understand this stock award

Post by mak1277 » Fri Mar 27, 2015 10:27 am

sunspotzsz wrote:thanks a lot, guys.

so this kind of option is worth far less than the $80k they claim, right? the stock of the company has gone up a lot recently and i think the upside is limited.

if another offer with same base gives a $40k cash bonus, then the cash bonus is probably better, right?

thanks!
I wouldn't necessarily say "far less". All depends on how you think the stock price will do. In your example, you have to decide if the certainty of $40k is worth giving up the possible upside of $80k or a lot more, but with the risk of getting zero if your options are underwater forever.

satch
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Re: please help me understand this stock award

Post by satch » Fri Mar 27, 2015 10:31 am

I don't think this is correct. The OP says the Black-Scholes value is $80k not strike price times number of shares. On the grant date there will be an equivalent cost for buying the option. Let's say the option price was $10 share. You would then get 8000 options.

Yes, but need all the inputs to be able to get the true amount, was just trying to give OP a basic example of how options work

Topic Author
sunspotzsz
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Re: please help me understand this stock award

Post by sunspotzsz » Fri Mar 27, 2015 10:33 am

mhc wrote:
satch wrote:Sounds like on the date of grant you will get $80,000 valued option. So say the stock closes at $20 on the date of the grant. Your award would be 4,000 shares at a $20 strike price. Since these shares vest over annual periods, the first 1,000 shares (25% of the shares granted) would vest a year after the date of grant. Once those 1,000 are vested you could exercise your option on those 1,000 shares. The remaining 3,000 will vest annually going forward the same way. Make sure you keep track of your options as they will have an expiration date and you don't want in the money options to expire. Say after a year your company stock is trading at $60 a share. Those 1,000 options have a $60,000 value and you only have to pay $20,000 - many people would do a cashless exercise i.e. same day sale, so you exercise your options and sell them the same day, your company gets the 20,000 strike price and you get 40,000....less taxes, trading fees etc....

Go to mystockoptions.com they have all sorts of info on employee NQSO awards etc....
I don't think this is correct. The OP says the Black-Scholes value is $80k not strike price times number of shares. On the grant date there will be an equivalent cost for buying the option. Let's say the option price was $10 share. You would then get 8000 options.


thanks. I still trying to understand how to calculate the shares of the option. again, let's say that the company is csco and i am starting today. the stock price is 27.15. based on the web below, the price of the option for the strike price of $27 is 0.17. So I would get 80000/0.17= 470588 shares?

that seems a lot.

http://finance.yahoo.com/q/op?s=CSCO+Options
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mak1277
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Re: please help me understand this stock award

Post by mak1277 » Fri Mar 27, 2015 10:37 am

sunspotzsz wrote:
mhc wrote:
satch wrote:Sounds like on the date of grant you will get $80,000 valued option. So say the stock closes at $20 on the date of the grant. Your award would be 4,000 shares at a $20 strike price. Since these shares vest over annual periods, the first 1,000 shares (25% of the shares granted) would vest a year after the date of grant. Once those 1,000 are vested you could exercise your option on those 1,000 shares. The remaining 3,000 will vest annually going forward the same way. Make sure you keep track of your options as they will have an expiration date and you don't want in the money options to expire. Say after a year your company stock is trading at $60 a share. Those 1,000 options have a $60,000 value and you only have to pay $20,000 - many people would do a cashless exercise i.e. same day sale, so you exercise your options and sell them the same day, your company gets the 20,000 strike price and you get 40,000....less taxes, trading fees etc....

Go to mystockoptions.com they have all sorts of info on employee NQSO awards etc....
I don't think this is correct. The OP says the Black-Scholes value is $80k not strike price times number of shares. On the grant date there will be an equivalent cost for buying the option. Let's say the option price was $10 share. You would then get 8000 options.


thanks. I still trying to understand how to calculate the shares of the option. again, let's say that the company is csco and i am starting today. the stock price is 27.15. based on the web below, the price of the option for the strike price of $27 is 0.17. So I would get 80000/0.17= 470588 shares?

that seems a lot.

http://finance.yahoo.com/q/op?s=CSCO+Options
The Black-Scholes calculation includes a number of assumptions (current strike price, dividend yield, stock volatility, interest rate, life of option), and it comes up with a per share value (but that value isn't going to be the stock price today). Without knowing each of the assumptions, you won't be able to come up with the value. What the Company will do is run the calculation, come up with a value per share, and divide $80,000 by that value to come up with a number of shares. You aren't going to be able to do it on your own, but they might be willing to give you an approximate number.

ETA: The link you gave is for options you can purchase...those prices have pretty much nothing to do with the Black-Scholes value of a NQSO.

Topic Author
sunspotzsz
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Re: please help me understand this stock award

Post by sunspotzsz » Fri Mar 27, 2015 10:48 am

mak1277 wrote:
sunspotzsz wrote:
mhc wrote:
satch wrote:Sounds like on the date of grant you will get $80,000 valued option. So say the stock closes at $20 on the date of the grant. Your award would be 4,000 shares at a $20 strike price. Since these shares vest over annual periods, the first 1,000 shares (25% of the shares granted) would vest a year after the date of grant. Once those 1,000 are vested you could exercise your option on those 1,000 shares. The remaining 3,000 will vest annually going forward the same way. Make sure you keep track of your options as they will have an expiration date and you don't want in the money options to expire. Say after a year your company stock is trading at $60 a share. Those 1,000 options have a $60,000 value and you only have to pay $20,000 - many people would do a cashless exercise i.e. same day sale, so you exercise your options and sell them the same day, your company gets the 20,000 strike price and you get 40,000....less taxes, trading fees etc....

Go to mystockoptions.com they have all sorts of info on employee NQSO awards etc....
I don't think this is correct. The OP says the Black-Scholes value is $80k not strike price times number of shares. On the grant date there will be an equivalent cost for buying the option. Let's say the option price was $10 share. You would then get 8000 options.


thanks. I still trying to understand how to calculate the shares of the option. again, let's say that the company is csco and i am starting today. the stock price is 27.15. based on the web below, the price of the option for the strike price of $27 is 0.17. So I would get 80000/0.17= 470588 shares?

that seems a lot.

http://finance.yahoo.com/q/op?s=CSCO+Options
The Black-Scholes calculation includes a number of assumptions (current strike price, dividend yield, stock volatility, interest rate, life of option), and it comes up with a per share value (but that value isn't going to be the stock price today). Without knowing each of the assumptions, you won't be able to come up with the value. What the Company will do is run the calculation, come up with a value per share, and divide $80,000 by that value to come up with a number of shares. You aren't going to be able to do it on your own, but they might be willing to give you an approximate number.

ETA: The link you gave is for options you can purchase...those prices have pretty much nothing to do with the Black-Scholes value of a NQSO.
I see. i found this calculator and did a quick calculation with a few assumptions and got a value of 7.645. this seems to be more reasonable.

https://www.mystockoptions.com/bs2.cfm? ... =Calculate


one thing I am still confused about is how to value this award versus cash sign up bonus from another company. Should I value $40k cash more? how about $50k cash?

thanks!
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mak1277
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Re: please help me understand this stock award

Post by mak1277 » Fri Mar 27, 2015 10:53 am

sunspotzsz wrote:
one thing I am still confused about is how to value this award versus cash sign up bonus from another company. Should I value $40k cash more? how about $50k cash?

thanks!
Tough call. Many factors at play.

- How significant to you and your net worth is $40k?
- Do you "need" cash now vs. waiting 5+ years for options to vest?
- How strong do you think the Company's performance will be?
- How do you feel about allocating $40k to (say) VTSAX vs. having an $80k bet on a single company?
- Are you a gambler? Do you want to take options for the fact that the upside could be (*could*) a lot bigger than $40k or even $80k?

satch
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Re: please help me understand this stock award

Post by satch » Fri Mar 27, 2015 11:01 am

one thing I am still confused about is how to value this award versus cash sign up bonus from another company. Should I value $40k cash more? how about $50k cash?
Also consider the terms of the bonus - how long do you plan to stay at the company? that bonus may require you payback a portion if you leave say after 2 years etc.... - You should have the company give you the value of the option award, give you an estimate

NOVACPA
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Re: please help me understand this stock award

Post by NOVACPA » Fri Mar 27, 2015 11:35 am

sunspotzsz wrote:
thanks. I still trying to understand how to calculate the shares of the option. again, let's say that the company is csco and i am starting today. the stock price is 27.15. based on the web below, the price of the option for the strike price of $27 is 0.17. So I would get 80000/0.17= 470588 shares?

that seems a lot.

http://finance.yahoo.com/q/op?s=CSCO+Options
If you purcahsed that option, it would control 100 shares, not 1 share.

To contol a notional value of roughly $80,000, you need to by 29 options at the 27 strike, based on the information you gave. That would be 2,900 shares or $78,735.

To break down the pricing in its simplest terms, the stock trades att $27.15. You have the option to buy it at $27, today, at a cost of $0.17. $0.15 of that cost comes from the difference in the stock price and strike price. $0.02 is the time value between today and the day the option expires, which is today. You are paying $0.02 in hopes the stock will close above $27.17, in which everything is profit for you.

Wagnerjb
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Re: please help me understand this stock award

Post by Wagnerjb » Fri Mar 27, 2015 11:51 am

sunspotzsz wrote:thanks a lot, guys.

so this kind of option is worth far less than the $80k they claim, right? the stock of the company has gone up a lot recently and i think the upside is limited.
No, the option is indeed worth $80k when you initially get the grant. That is what you could sell the options for in a free market. However, you cannot sell the options, you have to hold them and exercise them. The exercise value may be more or less than $80k and I would venture to guess the odds are 50/50 that the ultimate exercise value (if you hold to just before expiration) would be more than $80k.

Best wishes.
Andy

Topic Author
sunspotzsz
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Re: please help me understand this stock award

Post by sunspotzsz » Fri Mar 27, 2015 12:16 pm

thank you all so much!

now i think i understand it much better!
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