Here's a sizeable update after nearly another two years and some significant developments:
I ended up doing a 'net settlement' with the options package that was about to expire: the company took back the equivalent number of shares required to cover tax withholding and I accepted the net of that in company stock, receiving an actual physical stock certificate for my shares. No further money changed hands.
A while after I wrote the last post here, my company did in fact announce that it was being acquired in an all cash sale to another company. Woah! The entire closing process took another six months to complete. Here's how all of my various options packages over the years ended up:
- package A ... allowed to expire (net settlement was not available)
- package B ... exercised in the net settlement described above (this time it was offered ... apparently people weren't exercising), and physical stock certificate received
- package C ... fully vested, and paid out in cash by acquiring company at close of deal
- package D ... fully vested, and paid out in cash by acquiring company at close of deal
Because my company was acquired for cash, the transaction regarding my vested (but never exercised) stock options (packages C and D) was simple: (fair market value - strike price * number of shares) - withholding and payroll taxes, and I got a very nice bonus paid out into my checking account just like any other paycheck. The package B stock certificate had to be physically mailed in to an intermediate company that was handling settlement of the options, and the value of that stock was eventually paid to me in the same manner.
Once this was all complete, I spoke with my CPA and we've been estimating quarterly taxes just to avoid a large surprise next year (and so far I do still owe more than was withheld). I didn't bother to calculate what this might be, I just figured, "assume half of this goes to taxes and maybe I'll be pleasantly surprised" and that's been good enough. At this point my Q3 taxes are debited and I know exactly where I stand and exactly how much more I can be committing to investments. I also increased my umbrella insurance coverage, and my wife and I have since completed our will which is another big milestone I've been anxious to complete.
Looking at the windfall as a whole, I did the same thing I've done in the past when receiving any kind of bonus at work: break off half for taxes, take at least half of what remains and get that invested according to my IPS and desired AA, then break down the remaining quarter or so and make a plan. X% to charities, Y% to something nice for me and my wife, Z% to whatever else. Don't rush to spend any of it, just make that plan, let it sit and then come back and review, massage the numbers and let it sit again. Pay out the charitable donations first and then proceed with the rest. I also sent a handwritten thank you note to those in the company that would have had a hand in deciding to offer me these various stock option packages over the years, too.
And that is that. Since my company was bought for cash, there was really nothing for me to do other than get paid for the value of my options and stock, so that part was easy. I read plenty about IPOs and acquisitions and the details might have been very different if I'd held ISOs (vs my NQSOs) or if the company had been acquired in some other method, via stock purchase or what have you. So I consider myself lucky in that there wasn't really anything to decide.
What would I do differently regarding the package that I allowed to expire and the package for which I did the net settlement? Well, sure, in retrospect I'd have fully exercised both of them, but I still stand by my decisions at the time. The first package would have been a large outlay of funds for me at the time, and the second was still very significant, and in both cases I couldn't have predicted this acquisition happening when it did. It might well have been another five or ten years if at all, and I was still aggressively saving and investing all through that time, so I still did just fine. The sum of all these package payouts has greatly added to my investments and net worth, but ironically hasn't produced some fundamental change. I'm still working for now, my FIRE plans and anticipated date where I'll step away is unchanged, but I just feel that much more comfortable financially. We were already saving a large downpayment for a house purchase, and now that house purchase is now just more certain to happen, and perhaps we can reach a little further.
Here's what I learned from all of this, in case this useful to others:
- if stock options are offered, take them. The company is trying to find ways to reward you, even though it's only a 'maybe' kind of reward. It costs you nothing to accept the options. Read everything you can find on the subject in the meantime, particularly as it affects your flavor (ISO, NQSO, etc.) of options. Talk to your CPA.
- there's likely no need to exercise vested options before expiration. Just wait until expiration approaches (and do not miss that date!). I kept a spreadsheet of my options packages, when they were accepted, when they were fully vested, when they were expired and precisely when I needed to respond in order to exercise.
- if an options package is vested and approaching expiration, check with your company HR representative or whomever is handling the options. See if a net settlement is available and decide if you want to pursue that or fully exercise. You should at least do the net settlement.
- hope that your company goes public or is acquired, and of course that the fair market value of your options is worth more than the strike price! Talk to your CPA again. Learn about how the IPO or acquisition affects how your options could be paid out (again, could be very different if your company is bought for all cash, if your company's stock is purchased, etc.) Make a plan for any windfall received, let it sit, then review again before taking action.
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