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Old 04-12-2012, 01:17 AM   #21
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The delta between you current marginal tax rates (looks like 33%) and the LTCG rate of 15% is pretty significant. Even if the Bush tax cut expire next year the rate is still large 20% vs 36% plus what ever penalty you fall into because you make more than the magic $250K figure.
Yeah, I probably didn't explain that very well, but my calculations show that going for LTCG holding on my ISOs results in an effective FIT rate of about 25 or 26% under AMT, with the AMT credits carrying forward, with the FIT savings I'll get if I retire after a few more years and have very small incomes going forward. (I do show quite a few years of near-zero tax as I burn off the remaining AMT credit, like you describe.)

So by taking on the extra risk by holding for a year every time, plus the hassle of managing and reporting AMT, I probably move from 31 or 32% effective tax to 25 or 26% effective. And that's leaving aside state AMT considerations, which I also get to pay. (Yay.) So it's a pretty small improvement... not insignificant, but not nearly as compelling as the straight-up difference between STCG and LTCG, either.

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Understanding the interaction between the regular tax code and the AMT with respect to stock options is mind numbingly complicated (easily as complicated as understanding execution streams on hyper threaded multi-core microprocessor). My accountant at the time was only right 80% of the time (which was better than my 50%). Given the money involved I can't emphasis the need to find a CPA who is familiar with stock option as well as potential strategy such as utilizing stock options to hedge your potions.
What finally cinched it for me was purchasing BNA. It really seems to do a good job of multi-year projections. After I worked my numbers up in there, I went to two local tax management/advisors. Both did not get even the medium-hard stuff right, much less multi-year projections with multiple ISO exercises sequenced over a period of 4 or 5 years. I then went to the guy who wrote that book you recommend, and I ended up talking to his wife a bit. She happens to be a tax person who also uses the same software, and she helped me validate that I was at least punching the numbers in correctly.
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Old 04-12-2012, 01:20 AM   #22
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It may be too late but IRS 83-b could help.
Thanks. As it happens, an 83b election in my first year would have been a smart choice in retrospect. (But, many of these decisions are easier in retrospect, are they not?) My subsequent options were at higher strike valuations, and I did not have a lot of cash sitting around, and that was all many years ago and our chances of success were markedly lower back then.

But, boy it would be nice to have LTG and minimal AMT on that first grant block, today. Ah well. Next startup, maybe.
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Old 04-12-2012, 03:24 AM   #23
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At this point I think it is safe to say that you know more than the folks on the board and you aren't missing anything obvious. In general, I find the collective board's wisdom very useful for preventing people from doing stupid things, but not particular great and optimizing things that require specialized financial knowledge like stock options.

A million buck+ in stock options is nice problem to have!
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Old 04-12-2012, 02:15 PM   #24
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Well, I don't know about knowing more than the folks on the board, but I agree that it sounds like I haven't missed anything egregious.

I've learned a ton about finance and investing from reading this forum over many years, so I think major credit is due to you members anyway. Thanks for reading.
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Old 04-12-2012, 02:30 PM   #25
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One other thing that you do not mention, but I would suspect will happen since you indicate you are in a top management position....

What about NEW options I would bet that you are getting new ones (including the whole alphabet soup) of options each year as that is usually how companies handle bonus etc...

If so, I would be getting rid of as much as I could to keep my total investment in the company below 15% of overall portofolio... I know that some say 10%, but that is hard if you get a lot of compensation from options and stock grants...
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Old 04-12-2012, 03:03 PM   #26
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I also had the exact same situation. Part of your problem is that you have to document a plan of when you sell as I did. So you can't mange market up's and down's with your plan. You could look at the stock history and determine if there are patterns. My recommendation is build your plan to sell a minimum of 50% over the next 6 months, then another 10% of the balance every 3 months going forward. Lock in the gains and diversify. You have all your eggs in a single basket. Forget the taxes, just get yourself to a more flexible position. Take the cash, lock in the profits, move it to simple low cost index funds and remove the risk of a large portfolio in one place. If you retain any, keep the RSU shares.
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Old 04-12-2012, 03:27 PM   #27
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What about NEW options I would bet that you are getting new ones (including the whole alphabet soup) of options each year as that is usually how companies handle bonus etc...
Yep, good catch. I expect to probably receive a significant new grant this year and in ensuing years. Although those vest over many years, they will gradually work to increase my long position in the company. And so they do argue for selling more, now.
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Old 04-12-2012, 03:28 PM   #28
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Take the cash, lock in the profits, move it to simple low cost index funds and remove the risk of a large portfolio in one place.
Agreed, this makes sense. It was what I was assuming I should do. I am still looking for the magic incantation that somehow saves me hundreds of thousands of extra dollars, though.
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Old 04-12-2012, 10:20 PM   #29
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Yep, good catch. I expect to probably receive a significant new grant this year and in ensuing years. Although those vest over many years, they will gradually work to increase my long position in the company. And so they do argue for selling more, now.
If you may be leaving in a couple of years, the new options may expire when you leave the company or shortly thereafter, as I'm sure you well know.

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Old 04-13-2012, 12:05 AM   #30
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If you may be leaving in a couple of years, the new options may expire when you leave the company or shortly thereafter, as I'm sure you well know.
Yeah, this is another interesting facet. Pretty much no matter when I leave, there will be a stream of unvested options sitting out there in the future that I will leave on the table. I guess that is why they call them "golden handcuffs."

The fact is, there will come a point where the marginal utility of the remaining stream has diminished greatly. My guess is that happens between 3 and 4.5M net worth for us, but the fact is that the stock gains are likely to be so volatile that it is not worth much time spent trying to calculate it now. In some sense, I feel like I just have to ride the rollercoaster and see where it takes me.
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Old 04-13-2012, 06:41 AM   #31
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I'll just add it again...diversify. Don't let greed get the best of you. I did...I also had 100,000 options in my company, exercised 70,000 of them over time, thus cashing out a good portion of them. I actually had a schedule to sell them off, but when the stock price started dropping after June 2007, I got greedy and held off exercising on my schedule (they were all vested at that time) due to the decline in stock price. Our company is in a segment that tends to lead market declines and often leads market recoveries, so we were going down even while the market was peaking that October.

Bottom line, the stock never recovered to June 2007 levels, and is still below the 2002 strike price. The options expired in 2009, and I missed out on about $2m due to my foolish greed and expectation of recovery. I'm a pretty smart guy, but with this one I was REALLY foolish.

We no longer issue options, and we now have a restricted stock plan instead. I am expected to be a shareholder, so I do keep some, but I now sell most of it and diversify with each vesting.

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Old 04-13-2012, 07:11 AM   #32
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Agreed, this makes sense. It was what I was assuming I should do. I am still looking for the magic incantation that somehow saves me hundreds of thousands of extra dollars, though.
Unfortunately there is no magic. If you allow greed to cloud your judgement it will end up costing you money. Take the profits and diversify sooner vs later. I had 126000 options and I had in my plan for April 2011 to dump 100000 of them. I did and paid off the mortgage for my retirement home. When we announced earnings in June the stock dropped by almost 50%. My only regret was not dumping them all. I retired March 31, 2012. The 26000 plus another 8000 all vested the day I retired and I have 5 years to act on them. However today those 34000 options are worth almost nothing. I hope they recover before they expire, but I have my doubts. Take the money off the table. As long as your company and job are solid, you will get more. Pay the taxes and be happy you can.
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Old 04-13-2012, 09:16 AM   #33
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If you may be leaving in a couple of years, the new options may expire when you leave the company or shortly thereafter, as I'm sure you well know.

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Yeah, this is another interesting facet. Pretty much no matter when I leave, there will be a stream of unvested options sitting out there in the future that I will leave on the table. I guess that is why they call them "golden handcuffs."

The fact is, there will come a point where the marginal utility of the remaining stream has diminished greatly. My guess is that happens between 3 and 4.5M net worth for us, but the fact is that the stock gains are likely to be so volatile that it is not worth much time spent trying to calculate it now. In some sense, I feel like I just have to ride the rollercoaster and see where it takes me.

I would check this.... at my old mega, if you retired you still got to keep them...

wish I had some of the numbers that are being bandied around.... but not the case....
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Old 04-13-2012, 01:26 PM   #34
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A change of control in the company, like being bought by another company, usually triggers full vesting. So that's something you might watch for.
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