Stock Option Advice

[Jetsetter]

I am in need of some guidance. Thanks in advance for any ideas, or help and I know your help is just that and not anymore
I just reached the vesting period for the first of 4 equal blocks of stock options granted by my company. These are non-qualified options. The option price is $5 and the current stock price is $48. The company is in growth mode and the stock is at a 52 week high. I have 4000 options I can exercise at this time; however I can not sell the shares until June 30th as we are in a blackout period at my company. I need the proceeds to help a family member (mother) get back on her feet financially so I must unload in less than 1 year.
Here are my questions.

1) Should I just wait and do a cashless exercise? If I do this and an unforeseen situation arises before June 30th (loss of job etc) then I will be kicking my self forever

2) Send a check to my company for the $20,000 to buy the stocks, risking a loss between when I get the stocks and the open window to sell.

3) I know I will owe taxes for the spread between the current stock price and the option price, when is this due? Will my company demand it now, or do I have until next April to pay the IRS.

4) After using several online calculators I still do not understand the tax implications of the total process. Any help would be great. I am assuming 33% tax bracket.

Again any help would be great. Thanks for reading.
Adam

[tulog]

1) Should I just wait and do a cashless exercise? If I do this and an unforeseen situation arises before June 30th (loss of job etc) then I will be kicking my self forever

Since the options are vested, you can exercise them at any time within the restrictions of the agreement. I do not understand your comment about kicking yourself. If you were to lose your job, you would still be given by your agreement a fixed period of time to complete the exercise of the option (usually 30 days).

2) Send a check to my company for the $20,000 to buy the stocks, risking a loss between when I get the stocks and the open window to sell.

If you exercise now, you will be holding the stock until at least June 30th. The stock price may change from its current price level, but for you to "risk a loss" on this option, the market price would need to decrease to less than the option price of $5. When you sell, any market price greater than the $5 exercise price represents a gain. In any case, since you cannot sell until June 30th, the market prices between today's price of $48 and the price through June 29th (whatever it may be) are not available to you. You are simply not a participant in the market between today and June 29th.

The risk you are referring to is having less gain from a decrease in the market price of the stock after you have exercised.


3) I know I will owe taxes for the spread between the current stock price and the option price, when is this due? Will my company demand it now, or do I have until next April to pay the IRS.

You report ordinary income when the option is exercised. The amount of ordinary income is the excess of the fair market value of the shares received over the option price. Your company will withhold some amounts, which may not be the appropriate amount for the tax you will owe. You may be able to influence this amount by your regular W4 holding instructions. At tax time, amounts withheld appear on your W2.

I think the best approach, since you said you require funds soon, is to do a cashless exercise on June 30th. By doing this on June 30th and not earlier, you have less market risk since to exercise earlier would leave you unable to react to market price changes seeing that you are not allowed to sell until June 30th. So wait until June 30th. If the price goes up, you will have more tax, but also more gain. If price goes down, you will have less tax. Keep enough of the proceeds to pay any additional tax you will owe. See an accountant for this.

[Jetsetter]

Tulog,
Thanks for the reponse! I just learned after speaking to my finance department that these options are in fact Incentive Options. So I will buy the first block and sell a portion to help my mother. I will retain the rest until the 1 year hold period is up to reduce some of the tax implications. I appreciate your response!

[tulog]

Tulog,
Thanks for the reponse! I just learned after speaking to my finance department that these options are in fact Incentive Options. So I will buy the first block and sell a portion to help my mother. I will retain the rest until the 1 year hold period is up to reduce some of the tax implications. I appreciate your response!

Great. ISOs give you more flexibility.

Here is an article on calculating the holding period for long term gains:

How to Calculate a Holding Period