Stock Specialist

Hot Jobs presents

May 17, 2000

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Buck: Anyone in? Who's the best option right now for retiring wealthy in 5 years?

Ted: Find the next start-up company that is going to go public in 6 months and have a 10 times price run up, and be sure to include me in the friends and family round!

Victoria: How do I actually get the money out of my options?

Ted: To get the money out of your options, you have to exercise a vested option. Companies typically have two ways to do this. First, you can write a check to the company for the option price take delivery of the shares and then either hold the shares or sell them. There is also something called a "cashless exercise." Using this approach, you notify the company that you want to exercise and immediately sell your options. The company will then contact either their broker or transfer agent exercise the options on your behalf sell the stock and send you a check.

Tally Sagu: A hard one, how to predict the performance of a startup, especially for a pre-IPO?

Ted: If I could do it accurately, I would be a retired investor. But there are a couple of points you can look for. One, what's the track record of the management? Two, who are the investors? Three, do they have enough cash to cover their operating costs? From these three things, you can get a better idea of whether it's a good start-up or a bad start-up. As someone who has been in both at various points in my career, you learn by doing.

Djmomest: I am applying to a company that is going public in June; is there still time to get pre-IPO shares?

Ted: If you get in and get an offer letter from them before they go public, and their option granting practice is to grant options on the date of hire, yes. But companies make option grants three different ways. Some make the grant on the date of hire. Some make the grant at a fixed time every month. And some make the grant contingent on the approval of the Board of Directors. So you would need to know which of these approaches your company takes.

Quagga9: When should I exercise my options?

Ted: The safe answer is this is something you need to discuss with your investment advisor. A couple of rules of thumb are that your stock options represent, in effect, an interest-free loan from your employer. You are carrying a number of shares equal to your options and you are getting the appreciation for free. Therefore, if you do not need the cash, unless you are concerned that the stock has peaked, or you have a much better alternative investment, you should generally let your stock options ride. One of the biggest failings of almost everybody who has stock options is that they tend to exercise their options as soon as they vest. And this ends up leaving the majority of the opportunity represented by their options on the table.

Sarah: What's the difference between an "incentive stock option" and a "non-qualified stock option?"

Ted: The difference is the tax code. An incentive stock option is a creature of the tax code. By which, if you hold the stock for a year after you exercise it, then there's no tax at the time you exercise the option. Although, there is something called a tax preference item, which you should talk to your accountant about. And when you sell the stock after holding it for at least a year, the difference between what you sell the stock for and the option price is all capital gain. If you have a non-qualified stock option, when you exercise that option, you recognize ordinary income equal to the difference between the price of the stock on the day you exercise and the grant price of the option. Then, when you finally sell the stock any subsequent gain or loss on the stock will be a capital gain or loss.

Tommy: Ted what's a good strategy for sustained capitol growth?

Ted: By low, sell high. Practically what you want to do is ride your options until you think the price has peaked and then re-invest the proceeds. What too many people do is exercise their options and treat it as additional cash that ends up going for day-to-day expenses instead of investments.

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