Company Stock Options?


Thinks s/he gets paid by the post
Sep 6, 2002
Silicon Valley
I'm now in an unusual situation for me - I have vested stock options that are above water.  Now, I've had vested stock options and above water stock options but never both conditions at the same time.

What I'm trying to figure out is how to decide when to sell.  The two extremes are to sell now and get the money when the gettin' is good and at the opposite end is to ride them out for as long as possible and take a gamble.  Current value of the vested options is about 50% of one year's expected retirement income and the total value (vested and still unvested) is about two year's retirement income at current prices.

These are non-qualified so there is no tax benefit to holding but there is the inherent leverage.  At the current price of the stock a rise of 10% in the stock price improves my gain by about 35%.  The company prospects are good and they are making money and doing well.  Those all speak to holding on - at least for a while.  The question is for how long?

I have ESPP too but there I do what  I usually do and wait for the taxable holding period (~12-18 months) and then sell.  So, I don't have too large an exposure to my company's stock - just a fixed amount that's in ESPP waiting to be sold (~50-75% of one year's expected retirement income).  There is no company stock in my 401k.
The last time I held stock options was in 1998. I sold
when I left the company. Within a couple of months the
company was acquired by a "megacorp." for a large
premium over market. Of course the stock jumped to
the buyer's number at the announcement. One of the
poorest decisions timing-wise I ever made.

A friend has a worse story. Back in the 70s he got cross
ways with his employer (public company). He was let
go and sold his stock in a snit. Think he got $100,000.
When he told me the story, it was in the 90s and the
stock he sold was now worth over a million $.
Hindsight of course, and no point in dwelling. Just
move on............By the way, he is still working.

John Galt
My former company went through a merger several years ago, and the company shares in my 401K and my options dropped in value by more than a third and remain there after 4 years. Maybe you should consider selling increments periodically over the next few years, just in the event there is an unforseen return to the underwater state.

Stock options are interesting in that there's no downside risk -- it's all upside. Pure windfall. So, my only rule of thumb is don't get greedy. If your options are ever worth enough to make a difference in your life, take some money off the table. If the size of the windfall would be inconsequential, then let it ride (as long as you would have no regrets if they resubmerged underwater).

Personally, I've never made much from options. But I've known a few rollercoaster riders, including one guy whose options were worth about $100M at one point. He did the absolutely worst thing. Borrowed against the value of his stock, spent millions he didn't really have, and then watched the value plummet to below his loan value. Even worse, he exercised and held the stock, so he owed the IRS about $20M he didn't have.
Stock options are interesting in that there's no downside risk -- it's all upside.

Hmmm, not sure I see it that way. If you have vested options that are above water, then you have an asset. You may not have the cash in your hand, but that's true of most of your assets. If the asset goes away, then you have lost money ... downside!

The question of buy or sell is something else. One way to look at it is whether you would invest in that company at its current open-market stock price. If yes, then by all means hold the options. (If there's no tax advantage to exercising, then there's no point in doing so.) If the answer is no, then you should exercise and sell.

Having been in this position a few times, for me it was a simple binary decision.

If you very strongly, with supporting evidence, think the stock has good upside keep it. Low PE, new products coming out, improved competitive stance, new and improved management, magic 8 ball, blah blah blah...keep it until the fundamentals and/or good news have their say.

If the stock is fairly or excessively valued, sell it and diversify.

I took my grants and ESPP's and generally within weeks or months sold them and plowed the money back in to the market, only with a wider dispersion pattern. I was an idiot for 7 years and then a genius when the stock plummeted from about $80 a share to about $12 a few weeks after I sold my last batch.

If you want to keep the "wave" but diversify anyhow, buy a limited or broad index or stock bucket in the same category as your company.

For example, if you worked for a semiconductor company, buy one of the semi indexes or stock buckets. If you're unhappy with semi's but like tech, buy QQQ's. Dont like the tech picture so much, s&p500. Really want to buy the whole shotgun, buy TSM ETF's or funds.
The other thing that you must consider is that most companies put a timeframe within which the option must be exercised. For example, my under water options expire in 5 years from my retirement date. So if you wait to long and they go under water, you could end up with nothing.
It depends on whether or not the holdings in your company's stock represents a significant percentage of your net worth.

If it's small, then it really doesn't matter too much what you do. If have confidence in the Co. and want to treat the investment as "play/gambling' money, then let it ride.

If the holdings are significant, sell. The nice thing about stock options is that normally, they keep vesting. If the stock goes up over the next vesting cycle, just sell more. If you stop vesting, ask your management for more options.

Whatever you do, don't excercise without selling. If the stock goes down you could end up with a tax bill that's higher than what your holdings are worth.
To clarify, these stock options have never been under water. I started with a new company over a year ago and these are the first batch of vested stock options. I have been with other companies where my options were underwater or above water but not vested. In general, it's been my experience that the options have a life of about 7-9 years after the grant date before they expire but they expire very soon (2-6 months) after leaving the company (for any reason).

The current value of the vested options is about 30-40% of what I save in total from all sources (401k, ESPP, other taxable) per year. The prospects for the company do look good. I am planning on being able to retire in just about 7 years without any gains from the options included in those calculations. Because of this I'm considering letting them ride - for a while - but I'm still not sure where to stop the ride.

The end points are pretty obvious. If they are almost worthless then let them ride. If exercising will let you retire immediately then cash them in and begone. I do know the dangers of riding too long. I know of someone who was worth $40M in options but rode them into the ground - thankfully for them the stock has made a good turnaround and they're back into the million or two. I was dumbfounded when I heard about this as if I'd had that much I would have been gone. If they still wanted to work and let the options run they could have at least captured half the value and let the other half ride. That would have brought them $10M (assuming half got eaten by taxes) for a lifetime income of $300-400K.
If I were you I'd sell. I've been in this situation a few times, and I know very few people who made a mistake by selling, and many who were sitting on ER savings and blew it.

Sell some. If the stock goes down, you'll be glad that you did. If the stock goes up, no problem, since you are still vesting, sell more and you'll be happy.

It's great that you have confidence in the Co. But there are lot's of things that could cause the stk to fall that are outside the company's control.

If you had the cash for the value of your vested options, would you buy your companies stock, knowing that you're already benefiting from ESPP and future stock vesting? I doubt it.
I hear a lot of people saying things like "the company's prospects look bright, so I'll buy/hold/whatever."

If you believe in market efficiency, then those bright prospects are already priced in, so it shouldn't affect your decision to invest (unless you know something the market doesn't know).

Interestingly, it may be a better idea to invest in a stock for a company whose prospects don't look so hot. That's pretty much the definition of a "value stock," and the potential reward is higher because of the implied risk premium. (Another lesson Bernstein can teach you.)
I think I would sell the stock and reinvest it elsewhere. I'm not sure I could be objective enough to rate the value of the stock of a company for whom I work. And there's peer pressure to not sell.

If I really wanted to own equity in the work I did I'd start my own business. (I am considering this.)

If the company really takes off and does well you'll probably receive incentive bonuses in addition to more options vesting. Plus as long as you're working your position in a fast rising company is a resume asset.

Having [potential] investment money and my salary in the same company seems a little too concentrated for my tastes.
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