Stock Options and Corporate Liquidity Events


Your stock options offer great value, but only if you can successfully realize it.

Vesting periods, taxes, securities considerations, complex plan documents, career changes and dynamic financial goals can all make option-related liquidity events complicated to understand and difficult to optimize.

We’re here to help, proactively giving advice and guidance when you need it and keeping watch for potential issues before they arise. This means offering you financial peace of mind.

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Stock Options and Corporate Liquidity Events: What You Need to Know

What are stock options and how do they work?

From the difference between incentive stock options (ISOs) and non-qualified options (NSOs) to understanding how much money you’ll actually make once they’re exercised and the underlying shares are sold—here’s a sampling of what you need to know about your stock options.

What are the tax implications of exercising stock options?

Taxes for stock options may be complicated—involving federal, state, employment and other taxes—but if you understand the landscape and have a proactive advisor, you can protect your hard-earned wealth and still maximize your returns. For some clients, the right strategy may be a same-day, exercise-and-sell transaction, while for others, an exercise-and-hold strategy may be best. Choosing the right approach means understanding the type of stock options you have, the company’s financial prospects, and how these and other factors interact with your own unique tax situation and financial goals. Either way, The Colony Group is here to help.

What do you need to know about stock options and financial planning?

Once you understand the nature of your stock options, your exercise strategy and the financial and tax implications, it’s time to make some plans. What are your financial goals? From buying a home to paying down debt or building wealth for retirement or the next generation, stock options can work for you. With the right financial plan, you can turn opportunity into reality.

Making the most of your stock options

For executives, stock options can hold substantial value, but exercising them at the wrong time, or in the wrong way, can lead to tax liabilities and other issues that erode that value. Executives need to understand several things from the outset, including whether they have non-qualified stock options (NSOs) or incentive stock options (ISOs), but that’s only the beginning of building a tax-efficient strategy.


Taxes and ISOs

Incentive stock options have their own set of rules. For example, to the extent the fair market value of the stock with respect to which ISOs are exercisable for the first time in any calendar year exceeds $100,000, the options will not be treated as ISOs. Also, ISO terms are limited to ten years, and they typically must be exercised within three months of termination or separation.

Assuming they are properly treated as ISOs, the grant of ISOs is not subject to income tax; nor is the exercise, except that the option spread (post-grant appreciation) is treated as a tax preference under the alternative minimum tax (AMT). In a qualifying disposition, in which the stock purchased is held for more than two years from the grant date and one year from the exercise date, the gains are taxed as capital gains. However, in a disqualifying disposition that does not meet the above holding requirements, the spread at exercise is treated as ordinary compensation income, and the difference between the value on the exercise date and the sale proceeds is treated as capital gain. The AMT tax preference is eliminated if the shares are sold within the calendar year of exercise.

Whether it is better to engage in a disqualifying disposition or a qualifying disposition depends a great deal on an executive’s overall tax and financial circumstances. Understanding the various permutations requires an advisor who can take a holistic view of your position and not  just the stock options themselves.

Taxes and NSOs

Non-qualified stock options are common but are less tax-efficient than ISOs. With NSOs, the spread on the date of exercise is treated as regular compensation for income tax and employment tax purposes and is consequently subject to withholding. As with ISOs, NSOs aren’t taxed when they are granted, only when they are exercised, meaning that executives can benefit from potential long-term appreciation without any risk. They are often exercised in combination with ISOs, which can have an impact on the AMT.

With NSOs, a key consideration is reducing potential tax liabilities under FICA. Depending on how an executive is paid and whether they have met the Social Security wage base threshold, it is often possible to reduce the overall tax burden by bunching stock option exercises. This can mean exercising early or delaying exercising and then selling immediately. As with ISOs, financing is often required to execute these strategies.

Next Steps

Before exercising stock options, it is important for executives to retain a good advisor who not only understands the tax implications of the options themselves but also can look at their entire financial and tax picture, as well as the fundamentals of the company itself, to develop and guide an optimal strategy.

The Colony Group can help, from the moment stock options are granted until they are exercised and the shares ultimately sold. And then you can get on with building the life you want.

Follow the path to financial peace of mind.

Personal Financial Planning for Executives and Entrepreneurs

Featuring in-depth yet accessible analysis and lessons from The Colony Group’s team of experts, this book is a guide for successful executives and entrepreneurs in search of security and answers to their most pressing financial questions.

Financial peace of mind means not having to worry about your financial future, and we believe there are five key pillars to achieving this state: maximizing the rewards of working as an executive, achieving financial independence, minimizing risks, planning for taxes and planning for others. According to one study, two-thirds of corporate executives believe they need third party expertise when planning for their own financial futures, yet they are often reluctant to delegate responsibility to others. We understand this, and at The Colony Group, we pride ourselves on being true partners to our clients. We understand the unique needs of today’s corporate executives and leading entrepreneurs. It’s not enough to simply manage a portfolio. We believe our strategy must accommodate and encompass the client’s whole life, including their career goals and their aspirations for the future.

We also know that our clients often want to understand all the details of their finances, set goals for themselves, and have a direct hand in the outcome. 

To learn more about Concentrated Stock Strategies click here.

Life is full of opportunities. Here’s how to the most of them.

We help executives create and execute their financial plans and strategies at every stage of their careers. Some define financial independence as securing a comfortable retirement. Others want the option to retire to pursue other passions in life. Both require a solid plan driven by a team that shares your vision and has the expertise to help get you there. We’re ready to discover what’s possible when you are.

Ready to learn more? Now is the time to get in touch.

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