Share options

[KARL]

My son has two days to decide whether to accept share options in his employer (company). I know little or nothing about how these work but would like to know if there are any potential pitfalls if he accepts the offer. My understanding is that these are just what it says, options, and initially nothing more until he decides to take up the option. Only at that stage do wider implications arise such as potential tax liability, duty to declare any transaction, etc. On the other hand he tells me there is a multi-page document to sign (which document I have not seen) and I wonder what that is all about. Anyone out there willing to give my son and myself a concise synopsis of anything to watch out for or be wary of - or is it like a ticket to a show which you may decide never to use and at that point ceases to be of any potential significance whatsoever ?

[dr b]

An option is just that - an option that he never need to exercise if it is not to his advantage. Assuming they work in the UK more or less like in the US (where I am), typically he will get the option to buy shares in his company at a fixed price - say 50 (options are usually issued "at the money" - with an exercise price (the price he'd pay for the shares) equal to the current stock price).

So if the stock price rises to 60 he can buy the shares for 50, turn around and sell them, and make a profit of 10 (or just hang onto the shares and see if they appreciate further).

But if the stock falls to 40 he does nothing - why pay 50 for the shares when they are only worth 40?

So he cannot lose by signing up. Tax treatment may differ in the UK. so he should consult a tax professional (or his firm may have some documents that explain it). But in the US, the difference between the value of the stock and the exercise price is ordinary income - in the first example above, he'd have ordinary income of 10 (60-50).

Now, the only thing to further consider - is he getting these options in lieu of a higher salary? If so, he'd need to ponder whether the "sure thing" extra salary is worth more than the "speculative options", or vice versa.

But if this has no implications for his salary or other benefits, it's a no-brainer.

[vindi48]

BUT... if the employer were to go down the drain after the options are exercised - if they are - not only does your son lose his job but also the shares. An old caution is never to have shares in the company which employs you.

[dr b]

Quite true, which is why my first recommendation was exercising the options and selling the shares.

[society]

"An old caution is never to have shares in the company which employs you. "

What about those companies who matches ones retirement investment? The company I work for I invest 5% of each pay-check and they match my contribution with their stock. Are you saying that's a bad thing? I'm allowed to invest up to 15%.

[craft1948]

I made an absolute killing on share options in the company I worked for.

[dr b]

Getting company stock is better than nothing, but not as good as cash that you can invest as you prefer (and you should prefer to diversify!). Is your entire retirement savings in company stock. or just the amount that the company contributes? If it's your entire retirement account, then you are taking on a huge risk. Ask anyone who had a job as well as their life savings in Enron, Lehman Brothers, etc etc.

If you are allowed to ever sell the company stock (perhaps after a certain time elapses?) and invest in something else (like a well-diversified fund), you probably should.

[dr b]

craft - anything that allows you to make a killing, also allows you to get killed.

[society]

Even though there's a recession my retirement purse is getting fatter and fatter and...