Stock Option Sanity Check

[BanjoAndy]

Howdy - looking for a sanity check on a possible approach to my stock options. 

I've been with my company for about 5 years now and have about 1800 stock options which have vested (along with another 1100 which have not).  Exercise price on these ranges between $90 - $120, with current stock value hanging out around $125. 

A few things possibly worth noting:
- The industry I work in is volatile and prone to big market swings.  Depending on a variety of things I could easily see the value in the next year going up to 200/share, down to $30/share or staying flat.  None of these scenarios would surprise me.
- I have additional performance shares and shares purchased through an employee stock purchase plan. 
- I'm on target to FIRE in about 5 years and exclude all of my company stock from calculations around this goal.

I'm thinking of taking a percentage of the shares that have the strike price of $90 and do a same day/cashless sale and (after exercise costs/tax) take any residual proceeds and put them into my brokerage account (90/10 stock/bond indexes).  My thought process here is that;

-If there is a big swing up I still have a lot of stock which I can further benefit from.
-If there is a big swing down - I've saved a percentage from the loss.
-Proceeds going into my brokerage will ultimately help drive towards my FIRE goal. 

Does this strategy make sense?  Any pointers or comments on things I might be missing.  Thanks so much!

[secondcor521]

I faced the same question while I was working.  What I ultimately decided to do was exercise and sell (cashless option, same as what you're talking about) all options as they vested.  I did this mainly because I personally didn't need to take the risk of my employment, my employee stock, and my options creating a concentration of risk.  Also, I didn't want to take the risk because I was highly uncertain of the future of my company's stock.

There was another minor tax consideration for me.  Growth in the stock between the strike price and the exercise price was, for the options I had (NQSOs), treated as employee compensation and subject to ordinary income tax rates and brackets.  Growth in the stock between the exercise price and the sales price was treated as capital gains and subject to those rules.  I figured exercising sooner rather than later moved those gains from the former category to the latter category.  For this reason I also considered an exercise-and-buy-then-sell-one-year-later to get LT rates on the gain.  I ruled that option out again, due to the concentration of risk issue above.

The other issue you'll have to grapple with, incidentally, is that in your shoes your employer will probably continue to grant you additional options on a regular basis, so you'll always be in the situation where you've got unvested options that you'll think about sticking around for (usually when you leave the company, your remaining unvested options go away pretty quickly, and probably your vested options too).  This is why they call them golden handcuffs - to get the gold you have to stay in the handcuffs.  Eventually you'll have to decide to walk away from some money if you actually decide to FIRE.  I ended up retiring the day after a chunk of my options vested, and I solved the regret issue by completely refusing to look at how those options I lost would have done or would have been worth.  I just deleted them from Quicken and moved on with my FIREd life, happy to be free of the handcuffs, however golden they were or could have become.

Good luck!

[BanjoAndy]

Thank you so much secondcor521 - this is really helpful.  Also excellent point about when I get to the point of retiring from this career to just not look at any unvested options or calculating the values.  Appreciate the help!

[Blueberries]

I actually think your own intuition is correct on this one.  Take a portion, hold a portion.  Most people are quick to sell all or nothing and that's usually not the best approach.

[highflyingstache]

A couple other things to think on.

You make a living, currently, from this institution. The corporation pays you a salary, or hourly rate. It tacks on bonuses, options, stock payments and the like. This forms your "total compensation package". I work in a similar situation, where my salary currently makes up a mere 40% of my overall compensation.

I have coworkers, who have a spouse at the company. In the state of investing, we would suggest this would be looming towards the "putting all your eggs in one basket" plan. In the worst case, our hypothetical employee, their spouse, both receive paychecks, stocks (or options) plus bonuses, all tied to company performance. In the very worst ending, this is Enron, or another form of company that lies or stretches the accounting. The risk factor here, tying so much of your life to one company (that you have little to no control over, direction wise, even as a mid level management) to me, is absurd.

Absolutely, I will take the options, I will take the stock, the bonuses and other compensations. But I vest, I sell, I remove them from any interference with the company immediately. In my eyes, it's my money, which has no bearing on my job. Yes, it could go up 100%+ or of course down to 0%, but if I remove immediately, I get to have more say and control on what that looks like. I can make it VTSAX, an income property or splurge on a new car. It's my choice. Not the whims of any corporate entity. Unfortunately, even though the share (and therefore option) holder typically come first, let's be honest and say when push comes to shove and executives are getting golden parachutes regardless of performance; we can't really rely on anyone in the corporation as an individual to look out for your employee or shareholder rights. Much like voting in an election, you have a very small illusion of control over what happens in government. Here too, that's very small. I prefer to not ride the roller coaster at all, or (in a sense) as little as I possibly can.

Hopefully that makes sense.
By removing the stock, or options on a regular basis from corporate money, I'm Dollar Cost Averaging in reverse. It's my money, period.

[PDXTabs]

I'm with highflyingstache. You already have too much tied up in this one employer, so I vote sell immediately.

[trollwithamustache]

Excluding them from the FIRE calc is the smart thing to do.

I'll also vote for starting to sell at least half of what is getting granted each year. Take a look at your tax situation each year... if for example your spouse gets laid off and income drops, sell more. If more income may push you over a bracket/take away deductions sell less.

The big questions is after you start selling and it sucks your FIRE forwards, how serious are you about FIREing?  There is definitely risk to holing a large amount of company stock, but if you can quit in say January/February of a year and do a big stock option exercise/sell, all that income would hit in an otherwise low income year.

[lutorm]

If these are ISOs, you're aware that doing a cashless exercise will convert the entire grant into NQSOs, right? If the stock price goes up in the future, that will make them quite a bit less advantageous, for comparatively little gain right now. I don't know that I think you should do that.

I agree that you should diversify, but I'd do that by dumping the ESPP and shares you were granted directly and let the options sit for a while. If in the future the stocks go up more, you have access to a preferred price on them, and once you FIRE you won't be as concentrated in that company anyway. When do they expire?

[SanDiegoFIhopeful]

I don't have to deal with options so am not sure about the tax particulars there, but I'd say if you think there is a material risk of them becoming worthless (as opposed to RSU or ESPP shares that would merely decline) it would make sense to obtain value from them sooner rather than later. Seems like there is still upside from the unvested options.

In our situation dealing with just RSU and ESPP shares, we sell RSUs immediately as they vest. If your company situation is like my DW's, you are having taxes withheld as vested shares are released so you can sell whatever is leftover without any additional tax hit. Also, these grants will typically vest over a few years, so there is still plenty of upside to the share price in the unvested portion.

For ESPP shares, we sell every 6 months as a tranche reaches long term gain status (2 years from the opening of the purchase window). We took on more risk during our first 2 years of this strategy  than some on here who might advise to sell ESPP blocks immediately & pay ordinary income tax rates, but when DW began at the company the shares were IMO very undervalued, and now we are on a regular schedule of selling. 

[Car Jack]

The risk with options is the risk that they become forever worthless.  Been there, done that.  I developed a rule that if a vesting could make me the sales fee plus $20, they're gone.  That's worked well for me.  Friends who are eternal optimists watched share prices drop, never to go up again, then they left the company.  For $20, who cares.  In one case, it was $70k for me.  My buddy got zilch.

[lutorm]

The risk with options is the risk that they become forever worthless.  Been there, done that.  I developed a rule that if a vesting could make me the sales fee plus $20, they're gone.  That's worked well for me.  Friends who are eternal optimists watched share prices drop, never to go up again, then they left the company.  For $20, who cares.  In one case, it was $70k for me.  My buddy got zilch.

I see the stock options sort of like a lottery ticket I've been forced to buy. I'm not counting on the money anyway, so I might as well hold on to them to capture the upside. It's an asymmetric bet, the downside is limited but the potential upside is large. This is for ISOs where the strike price is small, though, I wouldn't use cash from other sources to bet on them.

Personally, I haven't had the choice since I can't sell my stocks except in rare circumstances, but I'm up 20x from strike price now. That is definitely more concentration than I'm comfortable with...