When to Exercise Incentive Stock Options [2024]
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- เผยแพร่เมื่อ 16 ก.ค. 2024
- Incentive Stock options (ISO) can be complex. When should you exercise your incentive stock options? Your incentive stock options are a high stakes balancing act. If you get it right, you get to enjoy newfound wealth…get it wrong, and a majority of your proceeds go down the drain. Exercising at the wrong time may subject you to a tax approaching a shocking 50 percent. And yes, one single day can make the difference.
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0:00 - 0:20 The stakes
1:20 - 10:32 Benefits of exercising Pre-IPO
10:33 - 12:09 Risks of exercising pre-IPO
12:09 - 13:51 Benefits of exercising approaching and IPO
13:52 - 14:54 Risks of exercising approaching an IPO
14:55 - 15:09 Schedule a meeting with Riley
15:09 - 18:04 Benefits of exercising Post-IPO
18:05 - 19:33 Risks of exercising Post-IPO
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There are two times to exercise, pre-IPO and post-IPO, but I’ll break it up into 3 distinct times when you can exercise:
1: Pre-IPO
2: Approaching IPO
3: Post-IPO
---------------------PRE-IPO---------------------
BENEFITS
1. More choices on when to sell and exercise
When a company is private, there are fewer chances to sell your stock.
2. Smaller Alternative Minimum Tax (AMT)
By exercising early, that spread may be smaller because the company is worth less. With a smaller spread, you may even avoid AMT altogether. In the case you do become subject to it, the amount owed will likely be much smaller.
3. Potential AMT avoidance
By exercising as your shares vest, for instance, you are inadvertently staggering them to the point where the taxes and credits can offset each other. You’re effectively utilizing previous AMT taxes to offset or reduce future AMT tax liability as you continue exercising.
4. Retain tax savings
Incentive stock options have tax advantages. Namely, the capital gains tax rate and avoidance of payroll tax. The term that’s used to explain this tax advantage is qualifying disposition.
5. Start the tax advantaged timer sooner
In addition to exercising within a prespecified time frame, there is a second requirement you must meet: don’t sell until it has been at least two years from the date of grant and one year from the date of exercise.
Be a champion by sharing this video in your company Slack channels so your co-workers can learn about these tips too!
RISKS
1. Risk of loss
One risk of exercising sooner is that you’ll be purchasing and paying taxes for shares that could potentially be deemed worthless in the future.
2. Liquidity risk
The sooner you exercise, the sooner you lose liquidity with your cash or savings. When you exercise, you have to pay for your shares. This ties your money up into something that you’re not sure if (or when) you’ll be able to sell and turn back into cash.
---------------------APPROACHING IPO---------------------
BENEFITS
1. Optimizing liquidity
The shorter time your money is locked up, the more access you have to it for other purposes.
2. Smaller risk of loss
If your company is approaching an IPO, that means that your company and its shares are more likely to have value.
RISKS
1. Your company might not IPO after all
Not all young companies take off.
2. More taxes
Because you’re waiting a longer period, the company has more time to experience growth and increase in value. This means more potential taxes.
---------------------POST-IPO---------------------
BENEFITS
1. You know if it’s “in the money”
“In the money” means you have something to gain by exercising your stock options.
2. The highest liquidity
It is much easier to sell public company stock (post IPO) than it is private company stock.
RISKS
1. The company could flop on an IPO
Waiting to exercise post-IPO might be too late. Why? Not all public companies enjoy their stock price going up.
2. Increased taxes for successful IPOs
If share prices skyrocket upon going public, that’s wonderful news...but you may also have to pay more taxes. I
3. Selling right after IPO can minimize gains
Once a company is public, the stock prices can drop for a couple of months because all the employees start selling their shares. They all sell at once because the lock-up period ends and they all want to recoup their investment.
#incentivestockoptions #ISO #whentoexersiceoptions
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Very detailed and helpful information, thanks!
I'm glad it helped! Feel free to share it with your co-workers.
Super informative video, thank you! This deserves way more views!
Glad you found it helpful! If you have any further questions, feel free to schedule an appointment, send me an email, give me a call, whatever works. 👊
Very helpful thank you!
Glad you found this useful! Have a great day!
Hi 👋 do you give private advice?
Thank you
Just booked an appointment :) thank you
@@carolinatabaipinese7752 Awesome! Look forward to meeting. See you then.
How do you find out your private companies fair market value?
All private companies that offer equity are required to get valued every 12 months. Your employer will know, just ask them what the most recent 409a value is.
If your company uses Carta, you can find the fair market value under the "Exercise Simulator" tab in their software.
@@tech_wealth thank you. My iso go live Tues so I need to check shareworks if they show the fair market. Thank you. Your video also taught me about amt. I didn't even know about the potential pitfalls with amt
@@santrader1707 Glad I could help! AMT catches a lot of people by surprise, so I'm glad you know beforehand.
What do you think of secfi or quid for non recourse financing?
Non-recourse financing is cool in that it shifts SOME risk from you...but NOT ALL risks.
For example, if you borrow money from them to cover costs, the stock loses value or becomes worthless, the company won't hold you personally liable to repay it. When they forgive the loan, the IRS may view that as a taxable event. While these companies will "let you off the hook," the IRS won't.