Been offered the opportunity to buy shares at work

theshortstack

Afternoon everyone,

I've just had an email from the company that I work for saying that they are giving me the opportunity to buy shares in their common stock.

The thing I'm a little confused is that the price they're selling them to me at are the same as they are on the open stock market (in fact, they're more expensive now that the price has fallen a little today).

I was under the impression that purchasing stock was supposed to be a benefit and that I would be able to purchase shares at a lower rate than they were on the open market.

Have I got that wrong? Or am I just missing something here?

Thanks for your help - appreciated as always!

gadgetmind

Is this just to buy shares or options? Is it in any recognised incentive scheme with tax breaks?

Oh, and your choice of words suggests you might be in the US, but apologies if I'm reading too much into things.

theshortstack

Thanks for the reply gadgetmind. I'm actually in the UK, but it is a US company which explain things.

The email I've had states that I have "an option to purchase shares of common stock" at a particular "exercise price" per share.

Forgive my ignorance, I just haven't been in this situation before

gadgetmind

OK, these sound like share options. You normally get granted these at an option price, have to leave them a few years until the vesting date, and can then optionally (you choose) buy the shares at the option price, which is called exercising the option.

If the share price has gone up, you make a nice capital gain. If it hasn't, you don't exercise the option.

Are they asking for any money up front? That would be unusual but I don't often encounter US share options.

theshortstack

Ah, that explains it - thanks for your help.

No, there doesn't seem to be any request for cash up front. Just some links to the company's Ts and Cs for this kind of thing.

Is there anything I should specifically be looking for as what you've said so far seems to make this a no-lose situation.

gadgetmind

Well, you'll find yourself watching the share price a right lot, and later on perhaps doing some reading about capital gains tax.

Hmmm, that's if these quality as "approved" share options in the UK.If they aren't, you'll have to pay income tax and NICs on the gain when you exercise. You'll then pay CGT on any gain between exercise and sale.

I think you'll have to read the Ts&Cs and maybe ask around at work.

RickyC_IFSWP

theshortstack wrote: »

Thanks for the reply gadgetmind. I'm actually in the UK, but it is a US company which explain things.

The email I've had states that I have "an option to purchase shares of common stock" at a particular "exercise price" per share.

Forgive my ignorance, I just haven't been in this situation before

So you have the option already or is it an invitation to buy the option?

If it's the former then it doesn't seem wise to exercise the option.

If it's the latter, as well as what gadgetmind has suggested already, you may also want to check if it's a European or an American option - it probably explains this in the t&cs.

jamesd

First, best to ensure that they are actually options. It is quite common for US firms to grant employee stock options as a form of bonus and it is most likely that they are. If you remove all of the identifiable information and post the contents of the notification we'd probably be able to tell you. However, the mention of the exercise price pretty much confirms that they are options.

Normally you'd be granted options and the exercise price will be set at the market price at the time of the grant. When the share price is less than the exercise price you can't sell at a profit, you'd lose money instead. When the share price is greater you can sell at a profit by exercising some or all of the options. Options that can be sold at a profit are called in the money. Those that can't are out of the money.

It is uncommon but not unheard of to be offered the chance to buy options. This is usually a good deal. You need to be sure that you have an outright grant, or to determine whether it's just an offer of the chance to buy. If it's an offer of the chance to buy then you'd need to take some positive action to get any options.

You will also normally need to do something so that you accept the options and the terms under which they are offered.

When selling what normally happens is that you sell and the broker pays the exercise cost out of the money from the sale, effectively lending you the money to exercise the option for the few days between selling and being paid. If you prefer you can sell and keep the shares. Normally that would be done with a "sell to cover" transaction that sells enough of the shares so that the price of those covers the cost of exercising all of the options. You then keep the extra shares that are left over.

Since they will undoubtedly not be eligible for UK tax breaks, the profit on the sale is taxable as PAYE income received on the day of sale. How this is handled varies. In the most smooth case the broker who handles the options will tell your payroll and they will add that to your taxable income for the month and thereby collect the tax and NI that is due, also paying their own employer NI on it.

It is common for options to have vesting dates. You can't use the options until the vesting date. You might, say, have 1000 options that vest at 25% per year. At the end of the first year, 250 will vest and become exercisable. The idea is that this helps to keep employees with the company. If you leave you will never be able to get any profit from the options that have not vested. Instead they normally expire soon after you leave, check the terms to find out exactly when. Thirty days or so is common but it could be immediate. What normally happens is that just before leaving a person will exercise all of their in the money vested options.

In option investing theory the optimal time to hold an option is until the day before it expires. This is because the value is the potential gain in the company price and the gain generally increases over time. There can be risk management reasons to sell sooner, if much of your personal wealth is tied up in options in the company that employs you. In such cases it can make sense to exercise the option so that you can diversify your investments so that they aren't so concentrated in the future of one company.

You're right that an outright grant of options is basically a no lose situation. The risk mainly comes from you borrowing to spend the money if the options become valuable, then suddenly lose a lot of value. This is the sort of thing that happened during the dot-com boom then bust around 2000. paper millionaires spent paper gains without exercising the options, then the share price fell and the options became worth much less or nothing. If they had exercised the options first they would have been safe. There are tax reasons why people might not want to sell, as well as the investing theory that longer holding times are better.

Don't worry about not understanding this. It takes a while to get used to it.

theshortstack

Thanks for all your responses, and James thanks for the time taken to put that post together - it helps a lot.

As requested, the opening few paragraphs of the email I've received are as follows (company name etc has been removed but, yes it is a US organisation)

Dear theshortstack

Congratulations, **company** Corporation hereby grants you an option to purchase x shares of common stock, with an exercise price of $42.63 USD per share and a grant date of June 6, 2014.

Your grant is subject to all of the terms and conditions of **company**’s 2000 Long-Term Equity Incentive Plan, which is included in the Plan Prospectus and can be found at: URL

A copy of **company**’s filings with the U.S. SEC is available for your review by going to URL. There you will find **company**’s Annual Report on Form 10-K by selecting “Annual Report” under “Filing Type”. You are encouraged to read the Form 10-K.

In the next few days, you will be able to review your grant documents and accept your option grant through your account at **Stockbrokers** Stock Plan Services, the online Plan Broker, unless you are in a country that requires paper signatures, then you will be receiving your grant documents to sign via email in the next 30-60 days. You should carefully read your Stock Option Agreement, including any country-specific terms set forth in Exhibit A thereto.

I've been given an email address to go back to with any questions, which I'm planning to use but I just want to make sure I've got all my bases covered before I reply.

gadgetmind

jamesd wrote: »

There are tax reasons why people might not want to sell, as well as the investing theory that longer holding times are better.

I sometimes delay for tax reasons, but other than that, I sell the shares and diversify into other equities. I just can't afford to take on massive single company risk when said company is also my source of income.

jamesd

Thanks for that quote. You have been granted options and there is no price to pay to get those options. You will need to log in to the stock broker site to accept the grant and the option plan conditions. Be sure that you do that. If you don't, you'll lose the options.