Introduction 1
Why I Wrote This Book: The Lessons of 1999 and 2000 1
Who Needs to Read This Book? 3
How to Use This Book 3
How This Book Is Organized 4
Part I: The Fundamentals of Stock Options 4
Part II: Details, Details: What You Must Know
About Your Stock Options 5
Part III: Money! 5
Part IV: Pay Up! Taxes and Stock Options 6
Part V: Changes and Special Circumstances 6
Part VI: The Part of Tens 6
Icons Used in This Book 7
Part I: The Fundmentals of Stock Options 9
Chapter 1: Stock Options: What You
Need to Know Right Off the Bat 11
Understanding Stock Option Basics 11
Knowing what stock options are 12
Knowing how stock options work 13
Exercising Your Stock Option(s) 15
Understanding the Right Nature of Your Stock Options 19
Comparing Stock Options to Actual Shares of Stock 20
Granting Stock Options: Why Do Companies Do It? 21
Hard work equals great rewards 21
Building (or trying to build) a stable workforce 22
“Diverting” cash from salaries to other uses 23
Comparing the Two Main Types of Stock Options 24
Chapter 2: Taking Your Chances: Getting Rich or Going Broke 27
Making Lots of Money: The Upside to Stock Options 28
When Good Options Go Bad 30
The sad story of underwater stock options 31
Is getting in early the secret? 32
Stock Options as Golden Handcuffs 34
What are golden handcuffs? 34
Conspiracy theory 35
Why stock options go underwater 37
Reading the Oxygen Meter on Your Underwater Stock Options 38
Real companies versus fad companies 39
Realizing failure isn’t just a fad 40
Chapter 3: Knowing What Kind of Stock Option Situation Is Best for You 43
Assessing Your Attitude: Entrepreneur, Investor, or Working Stiff? 43
The entrepreneurial approach to stock options 44
Stock options as an investment vehicle 47
Job security and a steady paycheck — but with a “kicker” 48
Considering Your Personal Situation 49
The Two Different Types of Employment Situations 50
High-risk, high-reward situations 50
Risk-managed situations 50
Putting It All Together 51
Determining the Best Situation for You 52
The risk-reward balance and your share of the ownership pie 52
Considering the external environment and your personal qualifications 53
Chapter 4: The Big Guys and The Big Picture 57
Recognizing the Big Guys? 57
Board members 59
Identifying the big guys and watching their moves 60
Understanding Other Big Guy Investment Vehicles 60
Restricted stock 61
Warrants 62
Convertible debt 62
Knowing How Much of Your Company the Big Guys Own 63
The earliest stages of startup 63
After the first few rounds of investment 64
After going public 65
The Fortune 500 stage 66
The “Friends and Family” Stock Program 67
Part II: Details, Details: What You Must Know about Your Stock Options 71
Chapter 5: Deciphering the Legal Language of Stock Option Agreements 73
Knowing What an Employee Stock Option Agreement Is 73
Figuring Out What Kind of Stock Option(s) You Have: ISO or NQSO 74
Trudging Through the Details of Your Stock Option Agreements 75
The date of the agreement 76
The number of shares 77
What kind of stock 78
The strike price 79
The vesting schedule 80
Split adjustment clause 82
Knowing When Your Option Is Exercisable 84
Exercising your stock options 84
Conditions of employment 85
Termination provisions 86
Change of control clauses 87
Blackout periods 88
Replacement clause 88
Restrictions on rights 89
References to your employment agreement 90
The rest of the legal language 91
Signature blocks 92
Chapter 6: Exercising Your Stock Options 93
The Four Reasons to Exercise Stock Options 93
“Show me the money” 94
“Save the money!” 94
Diversification 95
Tax reasons 95
Procrastinators, Beware! Getting All of Your Paperwork in Order 96
The Mechanics of Exercising Stock Options 97
Be sure to write (or call) 97
What do you get when you exercise? 98
Reading the tax forms when they arrive 99
Exercising Pre-IPO Stock Options 99
How Much Money Do You Need to Come Up With? 100
The cashless exercise 100
Paying for stock with real money 101
Chapter 7: Differentiating Pre-IPO and Post-IPO Stock Options 105
What Is an IPO? 105
IPO basics 106
How about your stock options? 107
Receiving Pre-IPO Stock Options 109
Pre-IPO option pricing 109
What can you do with your stock options before your company goes public? 109
What happens to your pre-IPO options when your company goes public? 110
What happens to your pre-IPO options if your company doesn’t go public? 111
Receiving Options When Your Company Is Already Publicly Traded 114
Riding the waves: How your stock options are affected by normal peaks and valleys in your company’s stock 115
The danger point: Joining a company right after a post-IPO stock price runup 116
Chapter 8: No Trading Allowed! Lockups and Blackout Periods 119
Understanding Post-IPO Lockups 119
Getting Through Blackout Periods 121
What is a blackout period? 121
Who is subject to a blackout period? 122
What is your blackout period strategy? 122
Chapter 9: Finding Stock Option Information Online 125
myStockOptions.com 125
MyOptionValue.com 126
StockOptionsCentral.com 127
www.stock-options.com 127
MyInternetOptions.com 128
The National Center for Employee Ownership (NCEO) 128
EDGAR? Who’s That? 129
Part III: Money! 131
Chapter 10: Determining What Your Stock Options Are Really Worth 133
Valuing Stock Options 134
Knowing your options’ value: Why it’s important 135
Getting complicated: The Black Scholes Model 135
The Value of Your Stock Options at Grant Time 136
Determining What Your Stock Options Are Worth Now 138
What Your Stock Options Should Be Worth 139
Determining What Your Stock Options Might Be Worth in the Future 142
Chapter 11: Stock Options and Your Overall Portfolio 147
Counting the Baskets 147
Understanding the Principles of Personal Financial Planning 149
Considering Your Equity (Stock) Holdings 150
Investing in Your Employer 151
Buying additional stock in your company 151
Your company’s Employee Stock Purchase Plan (ESPP) 153
You’re Wealthy! But Is Your Wealth Real or Only on Paper? 157
Two different kinds of paper wealth 157
Protecting (or trying to protect) your unvested stock profits 160
Sector Exposure 161
Part IV: Pay Up! Taxes and Stock Options 163
Chapter 12: Understanding the Basics of Taxes and Stock Options 165
Deciding How Much You Want to Worry about a Tax Strategy for Your Stock Options 165
Warnings and Possible Surprises Waiting for You 167
Tax laws change frequently 167
Owing taxes even if you haven’t received any cash 168
Key Tax Concepts 168
Ordinary income 169
Short-term capital gains 169
Long-term capital gains 169
Alternative minimum tax (AMT) 170
State Tax Considerations and Michael Jordan? 171
International Tax Considerations 173
Canada 174
England (U.K.) 175
Ireland 175
France 176
Chapter 13: Nonqualified Stock Options and Taxes 177
What Is a Nonqualified Stock Option (NQSO)? 177
Understanding the Basics: NQSOs and Taxes 178
Grant-time tax consequences 178
Exercise-time tax implications when you hold your shares 179
Exercise-time tax implications when you do a cashless exercise 182
Calculating taxes when you sell shares you acquire from exercising NQSOs 184
Complicating the Situation 186
Why you might owe taxes at grant time 186
Exercising and no taxes: Delayed income recognition 187
Understanding the Section 83(b) Election 187
Section 83(b) basics 188
Section 83(b) risks 189
Section 83(b) mechanics 189
Tax Withholding and Exercising NQSOs 190
NQSOs and Your Tax Forms 191
Your W-2 (and your pay stubs) 191
Form 1040 191
Schedule D 192
Timing Troubles: When Should You Exercise NQSOs? 193
As soon as possible 193
As late as possible 194
At regular intervals 195
One more consideration 195
Another Key Decision: Which Option(s) Should You Exercise? 195
Chapter 14: Incentive Stock Options and Taxes 199
What Is an Incentive Stock Option (ISO)? 199
Talking Taxes and ISOs: The Basics 200
Grant-time tax consequences 200
Exercise-time tax consequences 201
Tax consequences when you sell ISO shares 201
Pleasant disposition or nasty disposition? 202
Disqualifying Disposition of an ISO 202
Scenario #1: You make money on the deal 203
Scenario #2: You lose money on the deal 206
More about disqualifying dispositions 206
Nondisqualifying Disposition of an ISO 207
Alternative minimum tax (AMT) considerations and exercising your ISOs: A preview 207
The Stock Option Titanic Scenario 211
Beware the Wash Sale Rules! 214
Can Section 83(b) Help with the AMT Situation? 216
Part V: Changes and Special Circumstances 217
Chapter 15: The Alternative Minimum Tax and Stock Options 219
Understanding the AMT 220
Calculating AMT 220
AMT rates 220
AMT exemptions 220
AMT deductions 221
Combining the basic calculations and rates 221
Getting Some of Your AMT Payments Back 222
State Taxes and AMT Considerations 223
Chapter 16: Acquiring or Being Acquired:
Dealing with Corporate Change 225
Understanding Why Companies Sell Out 225
Seeking growth 226
Time to do something else 226
Receiving an unsolicited offer 227
Selling out was the plan all along 227
Dissecting the Deal 227
Acquisitions 227
Mergers 229
Divestitures 229
Additional outside investment 230
Cash versus stock deals 230
Private and Public Companies: The Mix-and-Match Combinations 233
Public company acquired by another public company 233
Private company acquired by a public company 234
Private company acquired by another private company 234
Public company acquired by a private company 235
What Happens to Your Options After a Change of Control? 235
The exchange rate means you get a new number of shares 235
Accelerated vesting (maybe) 236
Post-acquisition lockups 236
Sweetening the pot (or the golden goodbye) 237
Understanding the Tax Implications of a Change of Control 238
A Final Word: It’s a Whole New Ballgame After a Change of Control 238
Chapter 17: Trying to Predict What Will Happen to Your Stock Options 239
Looking at What’s Going on Inside Your Company 240
The retention and turnover picture 240
What’s the latest buzz on the company’s sales picture? 242
Watching the big guys and their (legal) insider trading activity 243
Is company management out of touch with the real world? 244
Cronyism 245
What’s Going on Outside Your Company? 246
It’s the economy, stupid! 246
Is your company in the buggy whip industry? 247
What the professionals are saying about your company 249
What the amateurs are saying about your company (and whether it matters what they’re saying) 250
Chapter 18: Leaving Your Job: What Happens to Your Stock Options? 251
Does the Reason You’re Leaving Matter? 252
Tick, Tock, Tick, Tock The Clock Is Running 252
Should You Sign a Termination Agreement? 254
Exercising Stock Options After You’ve Already Left 255
Read Your Stock Option Agreements Now! 255
What Happens to Pre-IPO Options If You Leave? 256
What About Underwater Stock Options? 256
Read Your Overall Employment Agreement 257
Beware the Dreaded Clawback Provision! 258
How Does Your Soon-to-be-Former Stock Option Package Affect Your New Job’s Compensation? 261
Special Job Change Circumstances and What Happens to Your Stock Options 262
Switching to part-time employment status 263
Switching to contractor status 263
Taking a leave of absence 264
Get the Lawyers! Lost Stock Options and Lawsuits 265
Part VI: The Part of Tens 267
Chapter 19: Special Stock Option Circumstances 269
Understanding the Three R’s: Repricing, Reissue, and Reload Options 269
Repriced options 270
Reissued options 274
Reload Options 277
Using Stock Options as Currency 281
Chapter 20: Ten Signs That Your Stock Options Will Be Worth a Lot! 285
A Steadily Growing Company 285
A Stable and Highly Qualified Management Team 286
A Very Active Board of Directors 286
Relatively Low Turnover Among Employees 287
Market-leading Products or Services 287
Returning Customers 288
Good Internal Systems and Infrastructure 288
Employee Empowerment 288
Thorough New-Employee Training Programs 289
Chapter 21: Ten Signs That Your Stock Options Will Probably Be Worthless! 291
The Serial-Entrepreneur Management Team 291
A Disinterested Friends and Investors–Dominated Board of Directors 292
A Revolving Door of Managers 292
Last One Out, Please Turn Out the Lights! 293
Rose-Colored Glasses Syndrome 293
High Levels of Customer Dissatisfaction 294
Poor Internal Systems and Infrastructure 294
Open Talk Among Employees About Leaving 294
Inconsistent Internal Communications from Management 295
A Sense of Panic 295
Chapter 22: Ten Things to Look for in Your Stock Option Agreement 297
What Kind of Options Are You Receiving? 297
Are the Dates Consistent and Logical? 298
Are There Inconsistencies in Details? 298
Is There a Clawback Provision? 298
Is There a Provision for a Change of Control? 299
Are the Expiration and Cancellation Details Clear? 299
Are There References to the Company’s Stock Option Plan? 299
What Is the Effect of a Stock Split? 300
What Can You Do and Not Do with Pre-IPO Options? 300
Are There Differences Among Stock Option Agreement Documents? 300
Index 301
