Author Topic: Company Stock Plan - Would You Contribute?  (Read 2176 times)

kasperle

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Company Stock Plan - Would You Contribute?
« on: March 03, 2016, 11:27:52 AM »
My company offers a stock plan. The way it works is this:

- I am automatically given 5% of my salary as options.
- I can convert 0 - 100% of my salary into additional options

The additional options I get are "discounted" by 40%. Note that this doesn't mean that I can immediately resell them for a profit (I wish!). It just means if I convert $10 of my salary to options, that I get $14 worth of options. So if I were to immediately buy them and sell them, I'd have to pay $14 to buy the options, then sell them for $14. My total expenditure would have been $24, so I'd have lost $10 (the amount that I "traded" for the stocks). The crux of this deal is that the company's stock needs to increase by at least 40% before I start earning money. Note that this is an approximation; the conversion is pre-tax, yet exercising the stocks is post-tax.

This confused me at first, so let me write out the numbers. I earn $280,000, so I have $14,000 worth of options for free. I converted an additional 5% of my salary into more options, which is another $14,000. But at a 40% discount, that gave me $35,000 worth of options.

They immediately vest, which just means I can buy them immediately. In other words, I don't have to stay at the company for a set amount of time before I can earn the right to purchase them. Also, I have 10 years to buy them.

Would you have contributed? A few days after I designated 5%, I felt like I had made a mistake. In 12 months, I'll have $49,000 worth of stock options in this company! And betting that their value will increase by 40% in 10 years seems like a pretty big bet.

The last thing you need to know is that this is a giant company that you most likely know the name of, and most likely use regularly. So it's not a little start up.

(If you happen to be able to identify the company based on this information, then congrats! You're quite the sleuth. Do me a favor and hold back from posting it; I don't want to share that information publicly. Thanks!)

Interest Compound

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Re: Company Stock Plan - Would You Contribute?
« Reply #1 on: March 03, 2016, 11:47:45 AM »
The crux of this deal is that the company's stock needs to increase by at least 40% before I start earning money.

Nope.

economist

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Re: Company Stock Plan - Would You Contribute?
« Reply #2 on: March 03, 2016, 11:52:06 AM »


The additional options I get are "discounted" by 40%. Note that this doesn't mean that I can immediately resell them for a profit (I wish!). It just means if I convert $10 of my salary to options, that I get $14 worth of options. So if I were to immediately buy them and sell them, I'd have to pay $14 to buy the options, then sell them for $14. My total expenditure would have been $24, so I'd have lost $10 (the amount that I "traded" for the stocks).


Not sure I am seeing the discount here. You pay $10 for the privilege buying $14 worth of options... for $14?

It's possible I'm misunderstanding. If you are really being given the opportunity to load up on options at a 40% discount, I'd say take it. Logically you should be able to purchase Put options (options to sell) on your own to hedge your overall risk. In ten years, for the stock to go up 40% requires less than a 4% annul return, it's very likely the broad market will return at least that, so if you expect your company to do about as well as the overall market the odds are in your favor.

2Birds1Stone

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Re: Company Stock Plan - Would You Contribute?
« Reply #3 on: March 03, 2016, 11:53:50 AM »
I would not.

kasperle

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Re: Company Stock Plan - Would You Contribute?
« Reply #4 on: March 03, 2016, 11:58:58 AM »
Not sure I am seeing the discount here. You pay $10 for the privilege buying $14 worth of options... for $14?

That's why I put the word discounted in quotes, heh. You're interpreting the situation correctly, though. One thing to keep in mind is that I get $14 worth of options for $14  always. So if the stocks were to shoot up to, say, $28 in 5 years, then I would be able to pay $14 at that time, then immediately resell them for $28 for a $4 profit. And if I had, say, 1000 stocks at the time, then that would be a $4000 profit.

Ultimately, I guess I'm "only" out $14,000 if this ends up being a bad decision. I plan to reduce it to a much lower percentage next year, just because there's not much reason to gamble any more than $50,000 on this, I think.

Interest Compound

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Re: Company Stock Plan - Would You Contribute?
« Reply #5 on: March 03, 2016, 02:10:56 PM »
there's not much reason to gamble any more than $50,000 on this, I think.

I don't see any reason to gamble anything on this:

  • If you didn't work there, would you be interested in purchasing stock options with these terms?
  • Are you interested at all, today, in purchasing stock options with similar terms on the open market, against similar companies in the industry?

Presumably the answer is "No" on both counts. So it should be "No" for your current employer as well. Especially when you consider the additional risk of investing in the company you work for...

neil

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Re: Company Stock Plan - Would You Contribute?
« Reply #6 on: March 03, 2016, 02:23:11 PM »
I am not even sure you are really getting a benefit beyond the company offering to sell you 10 year options at fair value (deferred taxes?)

http://www.fintools.com/resources/online-calculators/options-calcs/options-calculator/

If you try to value 10 year options, I seem to get ~$40 for 10 year options on a $100 stock, though this value is pretty sensitive to inputs of the calculator.  If you look at LEAPs on publicly traded options, you'll see ~10-15% premiums for two years if the strike price is close to the current stock price.  The valuation models are statistics based and doesn't consider value - so it is possible someone might make an argument for doing it on that basis.  However, I would not trust my ability to fairly value the company I work for.

If my math is in the ballpark, it wouldn't be much different from buying call options on the open market.  If you wouldn't normally do that, it probably doesn't make sense to buy these.