NSO strategies [Non-qualified Stock Options]

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crimzonthunder1
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NSO strategies [Non-qualified Stock Options]

Post by crimzonthunder1 »

I am very new to NSO's.

I have NSO options in a company that is about to IPO in July with an IPO price of about $25
Strike price is $10 and I have 12,500 of those, expiry for those options is in Dec 2021.
Once IPO'd, I guess got to wait for 6 months due to potential lock-in period for normal share holders. So won't be able to immediately liquidate it.

So just to exercise the NSO options the cost is $125,000 + $75,000 (Tax) = ~$200K
I have personal savings of about ~$350K and I don't want to take loans etc.,

What is a good strategy to maximize $$ here?

1. Wait till ipo + 6 months. Then exercise (and pay my ~40% tax on the entire cap gain) and sell?

2. Exercise pre-ipo (and pay ~40% tax on the unrealized capital gain) then wait for 6 months then sell it as a short term investment? Does it ever make sense to do this and not Option #1?

Are there other alternatives that I have missed out?

Thanks!
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David Jay
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Re: NSO strategies [Non-qualified Stock Options]

Post by David Jay »

Welcome to the forum!

Sometimes threads “scroll” off of the first page of the forum before anyone with specific knowledge sees the topic, let’s see if a “bump” gets you some replies. I know we have some members who have been through the IPO process.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
jarjarM
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Re: NSO strategies [Non-qualified Stock Options]

Post by jarjarM »

Since this NSO, taxation is a bit different than ISO. Option 1 is probably the safer route to go. You most likely already pay taxes at the moment of grant (treated as compensation income of FMV) so better off to wait until ipo+6months to exercise. With NSO, there' less path to tax saving.

https://blog.visor.com/equity/nonqualif ... 20granted.
kxl19
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Re: NSO strategies [Non-qualified Stock Options]

Post by kxl19 »

I've got options experience and IPO.

NQSOs are treated as ordinary income. In this case, there's really no advantage either way, since all gains are ordinary income. I'd say - if your total NW is low, and the IPO is life changing, you may want to cash in some of the options early to provide some security. But if the option value is small relative to total net worth, there's a "lottery ticket" that you could ride out.

ISOs have much better tax treatment. I'd strongly advise exercising any ISOs if you know an IPO is imminent, as the strike and FMV (during a private pre-IPO rounds) will be much smaller gap (ie, known as the illiquidity discount), and you'll have less subject to AMT than exercising post IPO. This also assumes if you think it's reasonable that the IPO would be successful (or at least have a value > the last private funding round)

Furthermore, if the company qualifies as a qualified small business, the pre-IPO exercised ISOs would be subject to 0% cap gains if held for at least 5 years.
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gobel
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Re: NSO strategies [Non-qualified Stock Options]

Post by gobel »

crimzonthunder1 wrote: Mon May 17, 2021 4:23 pm I have NSO options in a company that is about to IPO in July with an IPO price of about $25
Strike price is $10 and I have 12,500 of those, expiry for those options is in Dec 2021.
Once IPO'd, I guess got to wait for 6 months due to potential lock-in period for normal share holders. So won't be able to immediately liquidate it.
With NQs, usually same-day-sale is the least risk, and buy-and-hold for at least a year the best taxwise (assuming you expect a big gain after IPO). But I don't think option 1 will work with an expiration date in 12/21 and a lockup releasing in Jan. Buy-and-hold adds risk, plus this will cross tax years, so a worst-case-scenario is you buy in 2021 resulting in a big tax due in 4/22, but the stock tanks before that and you are left with a cap loss that will take years to use up.
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HanSolo
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Re: NSO strategies [Non-qualified Stock Options]

Post by HanSolo »

crimzonthunder1 wrote: Mon May 17, 2021 4:23 pm 1. Wait till ipo + 6 months. Then exercise (and pay my ~40% tax on the entire cap gain) and sell?

2. Exercise pre-ipo (and pay ~40% tax on the unrealized capital gain) then wait for 6 months then sell it as a short term investment? Does it ever make sense to do this and not Option #1?
I'm in favor of same-day-sale. I wouldn't hold the stock for any length of time unless I were certain that it wouldn't bother me much if the stock went to zero (or some other low number) while I was holding it. Consider whether you'd hold the equivalent in your stock portfolio under ordinary circumstances. I'm speaking as someone who experienced the dot-com boom-bust first-hand.

If for some reason one thinks they really need to hold the shares, they might want to ask their broker about "costless collars" (as insurance against a drop; although I'm not sure you can prevent an execution during your blackout period).

ISOs are another story. Some people got seriously burned by the AMT in the dot-com bust by exercising ISOs and holding the shares (like losing their house and such).
Last edited by HanSolo on Sun May 30, 2021 9:58 pm, edited 2 times in total.
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crimzonthunder1
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Re: NSO strategies [Non-qualified Stock Options]

Post by crimzonthunder1 »

gobel wrote: Fri May 28, 2021 3:04 am
crimzonthunder1 wrote: Mon May 17, 2021 4:23 pm I have NSO options in a company that is about to IPO in July with an IPO price of about $25
Strike price is $10 and I have 12,500 of those, expiry for those options is in Dec 2021.
Once IPO'd, I guess got to wait for 6 months due to potential lock-in period for normal share holders. So won't be able to immediately liquidate it.
With NQs, usually same-day-sale is the least risk, and buy-and-hold for at least a year the best taxwise (assuming you expect a big gain after IPO). But I don't think option 1 will work with an expiration date in 12/21 and a lockup releasing in Jan. Buy-and-hold adds risk, plus this will cross tax years, so a worst-case-scenario is you buy in 2021 resulting in a big tax due in 4/22, but the stock tanks before that and you are left with a cap loss that will take years to use up.
The options expiry is on Dec 31 and the lockup release is on Dec 15. So, I'd guess time it'd be time for a close shave, then :D
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crimzonthunder1
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Re: NSO strategies [Non-qualified Stock Options]

Post by crimzonthunder1 »

HanSolo wrote: Fri May 28, 2021 3:38 am I'm in favor of same-day-sale. I wouldn't hold the stock for any length of time unless I were certain that it wouldn't bother me much if the stock went to zero (or some other low number) while I was holding it. Consider whether you'd hold the equivalent in your stock portfolio under ordinary circumstances. I'm speaking as someone who experienced the dot-com boom-bust first-hand.
For the same-day-sale strategy, I guess some intermediate strategy like selling x% of the exercised stock right away, may work? From a tax perspective, is it better to exercise & sell 100% than some smaller x% ?
shess
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Re: NSO strategies [Non-qualified Stock Options]

Post by shess »

I have found this site to be a good resource in the past: https://fairmark.com/compensation-stock-options/

EDIT: I believe they have a forum area, too.
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gobel
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Re: NSO strategies [Non-qualified Stock Options]

Post by gobel »

crimzonthunder1 wrote: Fri Jun 18, 2021 9:54 pm
gobel wrote: Fri May 28, 2021 3:04 am
crimzonthunder1 wrote: Mon May 17, 2021 4:23 pm I have NSO options in a company that is about to IPO in July with an IPO price of about $25
Strike price is $10 and I have 12,500 of those, expiry for those options is in Dec 2021.
Once IPO'd, I guess got to wait for 6 months due to potential lock-in period for normal share holders. So won't be able to immediately liquidate it.
With NQs, usually same-day-sale is the least risk, and buy-and-hold for at least a year the best taxwise (assuming you expect a big gain after IPO). But I don't think option 1 will work with an expiration date in 12/21 and a lockup releasing in Jan. Buy-and-hold adds risk, plus this will cross tax years, so a worst-case-scenario is you buy in 2021 resulting in a big tax due in 4/22, but the stock tanks before that and you are left with a cap loss that will take years to use up.
The options expiry is on Dec 31 and the lockup release is on Dec 15. So, I'd guess time it'd be time for a close shave, then :D
My own answer confuses me now since it sounds like I was thinking ISO. However, maybe I was answering in the context of a small spread now pre-IPO, but an expected much larger spread post-IPO *and* that you wouldn't be able to do the same-day before they expired because of the lock-up (forcing you to choose option 2).

If you are sure about the release date, it seems far less risky to do the same day sale in Dec rather than front the 200k now and have to hold till Dec. I worked at a company in 2000 that IPO'd in the 20s, hit 70s within a week, and was below 10 by the time the lockup released.

btw, it seems strange to me that you've had the options so long that they are about to expire, yet the strike is at a hefty 10?
pseudoiterative
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Re: NSO strategies [Non-qualified Stock Options]

Post by pseudoiterative »

here's a reference comparing NSO versus other forms of equity compensation: https://github.com/jlevy/og-equity-compensation#stock-awards-vs-isos-vs-nsos

not sure if this will go into enough depth for you but there are links to further reading (discussing e.g. tax) in more depth
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crimzonthunder1
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Re: NSO strategies [Non-qualified Stock Options]

Post by crimzonthunder1 »

gobel wrote: Fri Jun 18, 2021 10:34 pm btw, it seems strange to me that you've had the options so long that they are about to expire, yet the strike is at a hefty 10?
I think you are inspired by ISO options here, I think. ISO expiry is usually valid for a decade or so. But if the ISO gets converted to NSO (say if you are leaving the company, layoff etc..) then the expiry on the NSO is much shorter. At least, that's how it seems to be in a couple of start-ups that I've worked.
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HanSolo
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Re: NSO strategies [Non-qualified Stock Options]

Post by HanSolo »

crimzonthunder1 wrote: Fri Jun 18, 2021 10:01 pm
HanSolo wrote: Fri May 28, 2021 3:38 am I'm in favor of same-day-sale. I wouldn't hold the stock for any length of time unless I were certain that it wouldn't bother me much if the stock went to zero (or some other low number) while I was holding it. Consider whether you'd hold the equivalent in your stock portfolio under ordinary circumstances. I'm speaking as someone who experienced the dot-com boom-bust first-hand.
For the same-day-sale strategy, I guess some intermediate strategy like selling x% of the exercised stock right away, may work? From a tax perspective, is it better to exercise & sell 100% than some smaller x% ?
I hadn't logged in for some time and just saw this.

My point was that I'm not one to substantially overweight any particular company in my investment portfolio, due to the not-so-insignificant risk that a given company can go to zero (or thereabouts). For me, that principle outweighs any consideration of tax optimization.

Of course, everyone gets to decide for themselves.

Good luck.
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