Stock Options Help

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luckyc1423
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Stock Options Help

Post by luckyc1423 »

I am having a performance review with my boss this week in which I will be receiving some amount of stock options.

the way the options work with this company is, I will receive an X amount of options at current valuation. At any time I have the option to purchase those shares at that current valuation, and I will make any difference between the current valuation to the "future valuation".

I will fully vest over a 3 year period. 33% each year for 3 years.

I do have one question so I can be "prepared" for the conversation this week with my boss incase I need to ask something.

We have had a lot of turnover in the company (firings) recently...50% of the sales staff, executives fired..ect...its a small company by they are very quick to pull the trigger if they get upset about anything.

Obviously if I quite before the first year I receive nothing, I need to be there at least 1 year to receive the 33%
1) Is this one year from my hire on date, or one year from when the option contract was given to me?

What happens in the crazy event that they decide to let me go (only worry about this due to the huge turnover rate). Do I lose all options or how does that work?
alex_686
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Re: Stock Options Help

Post by alex_686 »

luckyc1423 wrote:Obviously if I quite before the first year I receive nothing, I need to be there at least 1 year to receive the 33%
1) Is this one year from my hire on date, or one year from when the option contract was given to me?

What happens in the crazy event that they decide to let me go (only worry about this due to the huge turnover rate). Do I lose all options or how does that work?
Each company can set it own rules so everything is negotiable. However, generally speaking...

1. Options are dated from when they are granted, not from the employment date. I can't think of any exceptions out there.

2. Options are vested if you are terminated. This is a bit more fuzzy. Lots of lawsuits in this area. People being fired "for cause", which nullify the options, the day before the options vest or the company is sold. Things like that.

Here are a few more questions. How the options are valued if it is a private company. (I associate "small" with "private"). What happens if there is a change in control? Firm gets bought out, goes public, mergers, etc.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Valuethinker
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Re: Stock Options Help

Post by Valuethinker »

luckyc1423 wrote:
Obviously if I quite before the first year I receive nothing, I need to be there at least 1 year to receive the 33%
1) Is this one year from my hire on date, or one year from when the option contract was given to me?

What happens in the crazy event that they decide to let me go (only worry about this due to the huge turnover rate). Do I lose all options or how does that work?
It really depends on the contract.

If you have annual vesting, if within 1 year, you keep nothing. If 18 months say, you keep 1/3rd. If you have monthly vesting it's (num months/ 36)x total options.

Also worth knowing if your options are "accelerated" ie if the company IPOs (unlikely?) or is sold before 36 months are up, do you get 100% of your options or only those vested (they will only be worth something if sale price per share of business is above exercise price).

There may be a clause that lets you exercise the options at the time of leaving. That's a risky investment (to say the least) because they could wind up worthless, and it's not likely you will be able to sell them unless there is an exit event (sale or IPO). And the Venture Capitalists load in preference shares with something called Liquidation Preference to ensure they get paid back *first* before common stock holders get *anything* out.

I think it's more usually the case that you can exercise your vested options if you leave, rather than keep the options.

All of these things need to be checked against the actual contract.
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mhc
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Re: Stock Options Help

Post by mhc »

When you receive the options, there should be documentation available that answers all of your questions. If you cannot find the documentation, ask your manager, HR rep, benefits person, and/or the stock administrator. Otherwise, look for a co-worker that is knowledgable.
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dbr
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Re: Stock Options Help

Post by dbr »

As far as timing of options exercise, the "normal" procedure is to exercise shortly before expiration at ten years (usually). This is especially so if option grants are going to be an annual compensation benefit.

Others are correct that the situation if you expect to be fired or laid off is dicey. You will have to obtain policy from HR.
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Ethelred
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Re: Stock Options Help

Post by Ethelred »

dbr wrote:As far as timing of options exercise, the "normal" procedure is to exercise shortly before expiration at ten years (usually). This is especially so if option grants are going to be an annual compensation benefit.
I don't think that's the "normal procedure" at all. For most people, waiting ten years till expiration would leave them far too concentrated in a single stock, doubly so when you consider it's stock in the same company that also pays their salary.
dbr
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Re: Stock Options Help

Post by dbr »

Ethelred wrote:
dbr wrote:As far as timing of options exercise, the "normal" procedure is to exercise shortly before expiration at ten years (usually). This is especially so if option grants are going to be an annual compensation benefit.
I don't think that's the "normal procedure" at all. For most people, waiting ten years till expiration would leave them far too concentrated in a single stock, doubly so when you consider it's stock in the same company that also pays their salary.
You are not concentrated in stocks you don't own because you haven't exercised the options to buy them yet. When they are exercised one would exercise to sell so the purchase is covered by the gain as well as tax cost funded. The dilemma is when one finds oneself holding in-the-money options, pure profit for no investment, and one has to decide whether or not to take the gain or risk seeing the gain go away. There is no possibility of loss relative to an initial position of no options at all. The worst case is for the value to fall below strike and to simply not exercise the option. I think the psychology of this situation depends on whether options are an annual grant or a one-time windfall. I had MSOs for fifteen years running and found that on average exercising a year early out of ten actually did or would cost 10% of the benefit. That might have been a statistical accident.
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mhc
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Re: Stock Options Help

Post by mhc »

Ethelred wrote:
dbr wrote:As far as timing of options exercise, the "normal" procedure is to exercise shortly before expiration at ten years (usually). This is especially so if option grants are going to be an annual compensation benefit.
I don't think that's the "normal procedure" at all. For most people, waiting ten years till expiration would leave them far too concentrated in a single stock, doubly so when you consider it's stock in the same company that also pays their salary.
A common strategy is to extract as much of the extrensic value as possible, or at least a good portion of it. Maybe 80%. The extrinsic value decreases as the FMV goes up and as the option nears experiation.
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CaliJim
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Re: Stock Options Help

Post by CaliJim »

-calijim- | | For more info, click this Wiki
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Ethelred
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Re: Stock Options Help

Post by Ethelred »

I'm afraid I don't understand what you're trying to say.
dbr wrote:You are not concentrated in stocks you don't own because you haven't exercised the options to buy them yet.
Any options that are in the money are part of your net worth. If you exercise to keep they turn into stock, and if you exercise to sell, they turn into cash. Before you exercise them, they still have value, and you still own them.

The rest of your post agrees that options have volatility and may drop in price. Which is part of the argument that you should sell earlier than expiry.

If you can guarantee your employer's stock options will outperform the market every year, go ahead and keep them to expiry. Personally, I exercised many of mine early, and I'm glad I did, since about 90% of my remaining stock options are currently underwater.

That said, it seems it may be possible to hedge against poor performance of your stock options, but I don't know the details. In that case, holding to expiry may be the best choice.
mak1277
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Re: Stock Options Help

Post by mak1277 »

Ethelred wrote:
dbr wrote:As far as timing of options exercise, the "normal" procedure is to exercise shortly before expiration at ten years (usually). This is especially so if option grants are going to be an annual compensation benefit.
I don't think that's the "normal procedure" at all. For most people, waiting ten years till expiration would leave them far too concentrated in a single stock, doubly so when you consider it's stock in the same company that also pays their salary.
I think it depends on the situation. Last year, I exercised options that had appreciated by over 50% as soon as they vested. The appreciation was plenty good for me and I took the cash and put it into index funds that matched my desired AA. If the appreciation had been something much smaller, I would have held the options without exercising. I had set up a threshold in my head and if the options are/were above the threshold, I'm cashing out 100%.
Topic Author
luckyc1423
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Re: Stock Options Help

Post by luckyc1423 »

Ok just to answer a few questions about my particular case.

This is a private company and is a Canadian headquartered company. (I am located in the USA).

I don't fully understand how this works, but I am told the company "trades" shares on a private stock market in Canada were large funds and firms can invest money at a specific share price.

So if I wanted to, I could exercise my option and sale my shares at any time as they are traded on a private market (no idea how to look this up, I would have to call my boss to get a share price if I wanted to sell).

So the option will be given to me tomorrow, and the option price will be whatever the current or last trade round went for.

Sounds like I just need to ask the following questions
1) How is my stock value determined if you sell
2) how is my stock value determined if we merge with someone
3) how is my stock value determined if we go public
4) What happens in the event you have to go through layoffs and or you decide to remove or fire the sales force for whatever reason.

**I am not to worried about being fired as I am doing really well right now for the company (in sales). However, this is the first time working for a small private company and seeing such a high turnover rate I at least want to be well informed of what "could" happen**

This company right now is about a $200M dollar company. Since I am in sales I will have direct impact on future growth, so they are giving me options to let me get compensated from my participation and I assume to keep me with the company for atleast the 3 year period.

What is a fair amount of stock options? I am just curious so I know whether I am being treated fairly, if not I will try to negotiate more.

**meeting is tomorrow morning**
inbox788
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Re: Stock Options Help

Post by inbox788 »

luckyc1423 wrote:This company right now is about a $200M dollar company. Since I am in sales I will have direct impact on future growth, so they are giving me options to let me get compensated from my participation and I assume to keep me with the company for atleast the 3 year period.

What is a fair amount of stock options? I am just curious so I know whether I am being treated fairly, if not I will try to negotiate more.

**meeting is tomorrow morning**
Is your boss the owner/CEO? How many millions in sales are you bringing in? Unless or until you become important enough to them, you're not going to get much in the way of options. Don't lose focus on your salary and commissions and let the options distract you from being fairly compensated. Many if not most options will wind up being worthless.
Topic Author
luckyc1423
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Re: Stock Options Help

Post by luckyc1423 »

I received 25,000 stock options at a current valuation of $4.75/share.

The "plan/goals" for next year is to grow revenue within the entire company by 60% (this is a realistic number as we are growing fast) and move to 3 new markets.

So I would assume by the end of next year the share price will jump to atleast $5.50

They don't go in effect until January 2nd, and I won't receive the "official" paperwork on the options until a then.
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Ethelred
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Re: Stock Options Help

Post by Ethelred »

luckyc1423 wrote:I received 25,000 stock options at a current valuation of $4.75/share.

The "plan/goals" for next year is to grow revenue within the entire company by 60% (this is a realistic number as we are growing fast) and move to 3 new markets.

So I would assume by the end of next year the share price will jump to atleast $5.50

They don't go in effect until January 2nd, and I won't receive the "official" paperwork on the options until a then.
That sounds like a nice award!

Good luck.
Topic Author
luckyc1423
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Re: Stock Options Help

Post by luckyc1423 »

Yea, I was pretty happy.

Assuming I keep "kicking ass" I will receive another 25,000 in options this time next year.
inbox788
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Re: Stock Options Help

Post by inbox788 »

luckyc1423 wrote:I received 25,000 stock options at a current valuation of $4.75/share.

The "plan/goals" for next year is to grow revenue within the entire company by 60% (this is a realistic number as we are growing fast) and move to 3 new markets.

So I would assume by the end of next year the share price will jump to atleast $5.50

They don't go in effect until January 2nd, and I won't receive the "official" paperwork on the options until a then.
These are private options, no? Are the options worth $4.75? Or is the stock? What do you pay? When? Is there a current stock price? Option price? Strike price? Expiration?

Assuming the option increases by $0.75 in a year, your reward may be nearly $20,000. I assume your salary and bonus is many fold more. Some salespeople make more than that on a single sales commission. Keep the amounts in perspective. It's a decent perk, but not the only or main thing you should be concerned about. And it's a gamble and many employees are disappointed regardless of the number of options if the stock price falls.
dbr
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Re: Stock Options Help

Post by dbr »

luckyc1423 wrote: So I would assume by the end of next year the share price will jump to atleast $5.50
There's many a slip 'twixt the cup and the lip. Don't make any big plans right away.
Valuethinker
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Re: Stock Options Help

Post by Valuethinker »

luckyc1423 wrote:Ok just to answer a few questions about my particular case.

This is a private company and is a Canadian headquartered company. (I am located in the USA).

I don't fully understand how this works, but I am told the company "trades" shares on a private stock market in Canada were large funds and firms can invest money at a specific share price.
Canada is weird, securities legislation and regulation is provincial (state) not Federal largely (typical Canadian compromise, satisfying no one ;-)). So I am going to guess this is Vancouver or Toronto (or Calgary or Montreal).

So the Ontario Securities Commission (say) has allowed a scenario where "expert" investors (ie not protected by all the consumer protection legislation) can buy or sell shares, but it's not listed on the TSX (Toronto SE) or Toronto venture exchange.

If you google the company you may get a "share price" because they may have to publish it somewhere.

So if I wanted to, I could exercise my option and sale my shares at any time as they are traded on a private market (no idea how to look this up, I would have to call my boss to get a share price if I wanted to sell).

So the option will be given to me tomorrow, and the option price will be whatever the current or last trade round went for.

Sounds like I just need to ask the following questions
1) How is my stock value determined if you sell
Price you sell it for. You exercise, then sell, the capital gain is the difference between the exercise price set at time of issue, and the sale price.
2) how is my stock value determined if we merge with someone
Say your options are at $5/ share. And the company negotiates a sale at $8.50. Then you will get a net of $3.50 per share. If the company is bought out at $4.25, then you get nothing.
3) how is my stock value determined if we go public
Entirely depends. Usually there is a share reconstruction or recapitalization. For example your $1.00 ordinary shares get replaced by 10 $0.10 shares. So your options were at $5.00 share, you exercise, your 1 share is now 10 ordinary shares.

The underwriters (the lead underwriter is the bank on the top left hand corner of the prospectus cover) try to sell shares to institutional investors (fund managers) and negotiate a price base on orders. Say that is $2.00/ new share, you now have shares worth 10 x 2.00 = $20.00. Your gain is 20.00-5.00 = 15.00. Long term v. short term capital gains tax issues arise.

You may nor may not be able to sell shares at the IPO price. Usually the shares you don't sell are "locked in" for a period of 6 months to 2 years, i.e. you cannot sell them unless the sponsor investment bank (that left hand corner on the prospectus, again) grants permission-- you have to keep in the loop as to when "windows" appear.

4) What happens in the event you have to go through layoffs and or you decide to remove or fire the sales force for whatever reason.
Ask. Do you have to sell any shares back to them at book cost? Or do you keep shares. Normally options expire at that point (you lose them) but you may have a window to exercise but then you are putting money into a company that is then locked in unless there is a subsequent exit event (sale or IPO).
**I am not to worried about being fired as I am doing really well right now for the company (in sales). However, this is the first time working for a small private company and seeing such a high turnover rate I at least want to be well informed of what "could" happen**

This company right now is about a $200M dollar company. Since I am in sales I will have direct impact on future growth, so they are giving me options to let me get compensated from my participation and I assume to keep me with the company for atleast the 3 year period.

What is a fair amount of stock options? I am just curious so I know whether I am being treated fairly, if not I will try to negotiate more.

**meeting is tomorrow morning**
It depends on level. But as much as 1-2x annual comp (eg paid $100k, option exercise price is $5/share, so 20k options for each year) is probably within a range for senior execs. Certainly at least 10% of annual comp.


A word of caution, it's not wealth until you cash it in. It's just paper money-- I was a dot com paper millionaire once ;-). So take at least half the money off the table, when you can. You'll kick yourself if you are working for the next Microsoft (and when you pay a lot of tax) but you'll kick yourself even more if it drops to zero, and you didn't take money off the table (Nortel!).
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