Slashdot Mirror
Stock Options - What's Fair?
will-code-for-options asks: "I work for a technology company that makes stock options available to its employees. Assuming there is a correlation between employee title/rank and the number of options awarded; what do hi-tech professionals consider a 'fair' stock offering to be? What would be a 'generous' offering? Obviously there are a tremendous number of variables that influence a company's stock offering policy; all I'm really looking for are some data points to help serve as a guide. The (potentially complex) responses to this question could really help those of us who haven't had experience with the stock option lottery." Ask Slashdot last touched on this subject in the early days of 2000...needless to say that the economic climate has changed since then. Are stock options still worth anything, in today's economic climate, or should they be avoided?
I think of options as a zero-interest risk-free loan used to buy stock. If the price goes down, you lose nothing. If it goes up, you repay the loan when you exercise the options. So the first data point to use in valuing the options is the strike price times the number of shares. Beyond that, it's simply a matter of where you expect the stock price to go between now and when you're likely to exercise them.
Okay, here is my take.
Options are really worth it if you are in on the ground floor. I have a neighbor who was one of the early Red Hat employees. From Edgar it looks like he had ~500,000 options at about a buck. Considering they split twice, he was looking at ~2,000,000 options at about a quarter each. He's retired now.
My case was different. I was a grunt in a company that went public. I was granted 6000 options at US$4/share, to vest over four years. On my first year anniversary, I had 1500 shares and the stock price was US$44/share. Now, while my boss (who had over 144,000 options) was driving a new Porsche, I was not going to retire on ~US$60K, so I decided to exercise my options, yet hold on to the stock for the long term capital gains (keep it a year, pay less taxes).
A year later the stock was less than US$4 a share. Also, there is this thing called the Alternative Minimum Tax (AMT). Imagine my surprise when TurboTax told me that the government acts as if I had actually made US$60K that day, and it wanted its share: US$20K.
Yes, I am an idiot. Yes, I lost my shirt.
The moral? These days, options aren't that valuable unless you have lots of them. Also, exercise them as soon as you can.
What's funny is that senior executives are now refusing stock options and asking instead for preferred stock. Preferred stock pays high dividends. Under the new rules, dividends are not taxable as income. Go figure.
The Alternative Minimum Tax (AMT) will treat you as if you had income equal to the difference in the strike price and sale price on the day you exercised the options and you will be liable for the income tax on that amount.
Just being granted options that happen to be in the money will not cause this problem.