Do you need help understanding the options granted to you?
Non-Qualified Stock Options (NSOs) are a type of employee stock option where the employee has the right to buy company shares at a predetermined price. When you exercise the options, the difference between the strike price and the fair market value is considered compensation income, and is subject to regular income tax.
Do you need help determining the tax implications at grant?
Unlike RSUs, NSOs do not trigger taxable income upon grant, unless the option has a readily determinable market value. However, such situations are relatively rare with employee stock options.
Is the exercise price less than the FMV at the grant date?
The exercise price is usually the FMV of the stock on the grant date. However, if it’s less than the FMV on the grant date, the discount is considered compensation income and must be included in your income in the year of grant.
Are you subject to a vesting schedule?
Most NSOs come with a vesting schedule, where the rights to exercise the options accrue over a set period of time. This could be based on continued employment or other performance metrics.
Will you be subject to clawback provisions?
Clawback provisions depend on the specifics of your NSO agreement. They allow the company to reclaim the options or any profit realized from them under certain circumstances, like misconduct or a restatement of financial results.
Do you need to review how termination of your employment (voluntarily or involuntarily), disability, or death might affect your interests under your plan?
The impact of these events on your NSOs varies by plan, but it’s common for there to be specific provisions that apply in these circumstances. For instance, you may have a limited time to exercise vested options after employment termination, or your heirs might be able to exercise your options if you die.
Do you need help determining the value of your interests?
The potential value of NSOs depends on the current and future price of your company’s stock, the exercise price, and the number of options you have. A financial advisor can help you understand the current value and potential future value of your options.
Do you need to assess your employer’s future equity value and long-term viability?
This is important as the value of your NSOs is directly tied to the company’s performance. Factors such as the company’s financial health, industry trends, and economic conditions can all affect the company’s future equity value and should be considered when planning your NSO strategy.
Do you need help determining the income tax implications of exercising vested options?
When you exercise NSOs, the difference between the exercise price and the fair market value at the time of exercise is considered ordinary income and is subject to income tax. A tax advisor can help you understand the potential tax implications of your decisions.
Are you permitted to exercise early and purchase stock before vesting?
The ability to exercise NSOs early depends on your specific grant agreement. If allowed, doing so could have significant tax implications, so it’s important to seek professional advice before making this decision.
Do you lack the funds necessary to do a cash exercise?
If you don’t have the funds to pay for the exercise price and the associated taxes, you may want to consider strategies such as a cashless exercise (also known as a same-day sale or sell-to-cover), where you sell enough shares at the time of exercise to cover these costs. However, this decision should be made in consultation with a financial advisor, considering your overall financial situation and goals.
Do you own unvested shares due to an early exercise?
If your NSO plan allows for early exercise, you might own shares that are not yet vested. Owning unvested shares can come with certain risks, such as the possibility of forfeiting those shares if you leave the company before they vest. It’s crucial to understand the terms of your plan and the potential implications.
Do you need help determining the basis of your shares?
The basis of your shares for tax purposes is generally the exercise price you paid plus any amount you had to report as income when you exercised. A tax or financial advisor can help you calculate this accurately, which is essential when you sell the shares and need to calculate your capital gains or losses.
Do you need help understanding the tax consequences of the sale of shares acquired through your options?
The difference between the sale price of your shares and your basis is generally treated as a capital gain or loss. If you’ve held the shares for more than a year, it’s typically a long-term capital gain or loss, otherwise, it’s considered short-term. These categories are taxed at different rates.
Does the company require preclearance or have blackout or window periods that might affect your ability to trade your shares?
Some companies do have policies that restrict when and how you can sell your shares. For instance, blackout periods are times when employees are not allowed to trade company shares (typically around financial reporting times), and preclearance requirements mean that you have to get approval before making trades. Check your company’s policy and consult with a financial advisor to understand how this might affect your NSO strategy.
Do you need to increase your withholdings (beyond any employer withholdings) or make estimated payments for taxes attributable to your options?
Exercising NSOs can result in additional taxable income, potentially pushing you into a higher tax bracket or leading to an underpayment of taxes for the year. If your employer does not withhold enough taxes when you exercise the options, you might need to make estimated tax payments to avoid penalties.
Do you need to evaluate your company stock position?
Having a significant portion of your wealth tied up in one company’s stock can present a concentration risk. Diversifying your investments can help mitigate this risk. You should consider your overall financial situation and goals when deciding what to do with your NSOs and any shares you acquire from exercising them.
Do you need a plan to mitigate concentration risk?
A financial advisor can help you create a plan to manage concentration risk, which could involve regularly selling shares obtained through option exercise and investing the proceeds in a diversified portfolio.
Do you need help factoring in the risks of a stock price decline when considering whether to exercise and/or to make the IRC §83(b) election?
Exercising options and choosing to make an IRC §83(b) election involves risk, including the possibility that the stock price will decline in the future. It’s important to evaluate these risks in the context of your overall financial situation and risk tolerance.
Do you need to address your options in your estate plan or in a pending divorce?
NSOs and the shares obtained from them could be significant assets that need to be considered in estate planning and divorce settlements. Professional advice can help ensure these assets are handled appropriately.
Do you need to consider any state-specific issues?
State laws can impact the taxation of NSOs and the shares obtained from them. You might need professional advice to understand any state-specific issues that apply to you.
Do you have future financial goals that your options could help to achieve?
NSOs can provide significant wealth if managed properly, and this wealth can be used to achieve a variety of financial goals, such as retirement, education funding, or purchasing a home. A financial planner can help you develop a strategy for using your NSOs to achieve your goals.