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It's Decision Time for Stock Option Holders

November 03, 2000|LIZ PULLIAM WESTON

If you have employee stock options, you may need to make some important--and difficult--decisions in the next two months.

Big drops in many technology shares, a volatile stock market and the rapidly approaching end of the tax year are all combining to make this a challenging time for dealing with options. Workers who once hoped that options would make them rich are instead holding grants worth a fraction of what they were just months ago, if they're worth anything at all.

What you should do now depends on the type of options you have, the decisions you've already made and your outlook for the future.

Below you'll find suggestions from tax advisors and financial planners about dealing with common stock option scenarios. But first, it's important to know what kind of options you have, since their tax treatment differs greatly. (See accompanying sidebar.)

You also should understand that a newspaper column is no substitute for professional tax advice. If you have stock options, you need to consult a tax advisor about all the ramifications of their exercise and sale. This is an extraordinarily complicated area of tax law and financial planning where it's easy to make costly mistakes.

But the following scenarios and suggestions should give you an idea of the types of situations you may face, and general advice for dealing with them:


Scenario 1: You're sitting on worthless options.

Advice: Talk to your employer.

Turmoil in the stock market, particularly among technology stocks, means that many employee stock options are "underwater," or worthless. (A stock option is worthless when the price at which you're allowed to buy the stock--the "strike" or "exercise" price--is higher than the stock's current trading price.)

If you are a valued employee and the company wants to retain you, they might issue you new options at a more favorable exercise price or "reprice" the options you already have. For instance, if the company's shares are currently trading at $50 and your current option grant allows you to purchase the stock for $75, the new or repriced options might give you a $25 exercise price.

These actions will come at a cost to the company, and your employer may face some limits on the number of options that can be issued. But many high-tech firms have been eager to take these actions lest they lose employees to competitors.

In April, Microsoft fueled the trend by granting new stock options to all 34,000 full-time employees, trying to make up for the stock's nose dive.

If you believe in the company's future prospects, new or repriced options can be better than a salary boost, said Bill Jacobs, a tax manager and CPA with Burr Pilger & Mayer in Palo Alto.

"People can really score big with options, particularly if the stock goes up 20 or 30 points," he said. Besides, "it's tough to get the cash out of a company."

Of course, new or repriced options could also become worthless if the stock price continues to dive. But workers generally have 10 years to exercise an option grant, which should give most stocks plenty of time to recover, said Tim Kochis, a financial planner with Kochis Fitz in San Francisco.

Employees might consider pushing for cash bonuses or a boost in salary in addition to or in lieu of options if they've been living on credit cards or inadequate pay while waiting for their stock option gamble to pay off.

"People shouldn't extend themselves so much that if the bet doesn't work out, they would be in trouble," said CPA and financial planner Karen Goodfriend of Palo Alto's GoldsteinEnright Financial Advisers.


Scenario 2: You're sitting on options that still have some value.

Advice: Review your goals.

Given the uncertainty of the stock market, you may be worried that future downdrafts could further erode the value of your options.

If you have a specific short-term goal for the money your options represent--a home down payment within the next few years, for example--then it's probably time to cash out. The stock market is no place for money if you'll need to get your hands on it quickly. You may lose out on any price rebound, but you must weigh that against the very real chance that your options could lose even more money.

If you can afford to wait out any short-term fluctuations and believe in the long-term future of your company, it can be worth holding on.

The exception: If most of your net worth is tied up in company stock or stock options, it's probably time to begin diversifying. If you need an incentive, just look at all the former "dot-com" millionaires whose fortunes were obliterated by a declining market.

There may be a silver lining in today's stock market upset if you have incentive stock options that are just barely "in the money," meaning you show only a small paper profit, said Philip Holthouse, a CPA and partner with Holthouse Carlin & Van Trigt in Los Angeles.

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