Receiving stock options from your employer is great, as it indicates that your company sincerely values you.

They want to keep you, and keep you happy! Furthermore, stock options can be a fantastic opportunity to make a lot of money!

Exercising employee stock options - May. 28,

However, knowing how to optimize these potentially winning lottery tickets is no easy task. You need to consider things like income tax, alternative minimum tax, holding periods, vesting schedules, concentrated equity, valuations, etc. Instead of being paralyzed by that complexity, you should focus your energy on asking the some key questions, both of which are actually quite simple: And how much company stock do I want to hold?

Your answers to these questions should dictate how you develop a plan and implement a strategy to achieve your goals. In my experience, every client answers these questions differently, but their answers all seem to fall under one of these three mentalities:.

Well, sort of… but not really. You have to bet big to win big. For some, betting big on company stock ownership is a risk that they are willing to take.

3 Stock Option Exercise Strategies | Finance and Flip Flops

By following this strategy, the employee will accumulate and hold as many shares of company stock as possible. If the company stock price goes up, then the employee will be a big winner! If, however, the company stock goes down, then the employee could lose big…. To implement this strategy in the most effective way, employees hold restricted stock units after they vest vesting occurs after a period of time determined by the employer.

Basically, this is the opposite of diversification. Many employees who receive company stock or stock options decide to treat those shares as compensation. Quite simply, this strategy that means you have no interest in holding the stock. With so much connected to one company, the employee feels more comfortable shifting their investment exposure away from that one company. Who wants to be the only employee at the water cooler holding zero shares, with no one to high five, when the company quadruples in value?

The stock price could go down.

By holding too much stock, you put yourself at risk to lose a lot of money should the company fail. The range of how many shares to hold differs across the board. Some clients choose to maximize their exposure without putting personal assets into the mix by exercising a cashless exercise. Before you find yourself digging too deep into the details of discussing the alternative minimum tax, 83 b elections, and the differences between incentive stock options and non-qualified stock options, take a step back and a deep breath.

Take some time and review your goals. Is your goal to keep as much company stock as possible, knowing that you could lose it all?

Or is your goal to get rid of it all right away? Once you determine your goal, you can begin to develop an effective strategy to accomplish that objective in the most efficient way possible. None of the information in this document should be considered as tax or legal advice. You should consult your tax and legal advisors for information concerning your individual situation.

Diversification does not guarantee a profit or protect against a loss.

When to Exercise Stock Options - 5 Factors to Use

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