Any help deciphering my partner's investment options

Samsonite1

I must firstly apologise that I do not know much about this area and my questions may be poor.
My partner is asking me to help make decisions on shares and stock options in terms of cashing out and re-investing.
I am under pressure to help, but I am not knowledgeable in this area.  She reckons her company are not public, so that may make it easier, but my own company are the same and we only have stock options, nothing else.
She wants to know how much to cash out and how much to invest, but also in relation to shares and options.  We tried researching the difference, but it was not clear what is best.  There is also taxation to take into account.

My opinion was to cash out more than you might normally want to because of the current global climate.  That made sense, but then the choice of shares over stock options and tax implications made it difficult to work out a sensible balance.

I appreciate nobody may know the answers, but I would hope that this is not completely unusual!

Many thanks in advance!

bowlhead99

A share is a fractional piece of ownership of a company which usually comes with voting rights, the right to receive dividends if they are paid, and the right to receive a portion of the proceeds if the whole company is wound up or sold (of course, if the company fails to meet its objectives there may be no proceeds for the shareholders when it is wound up after all the creditors have been paid off - and if the company needs more capital, whoever comes along to buy it may only be willing to pay £0.0000000001 per share to take it over)

An option is a right - but not an obligation - to buy x amount of shares in the company at an agreed price of y per share.

The value of options is more volatile, with greater scope to make a bigger return than by simply owning the shares. 

For example if the value of a share is $1 and you have the option to buy 100 of them at $0.75 per share, you will make $0.25 per share and $25 profit when you exercise your option to buy the share (or you 'cash in' and sell the option to someone else without actually paying all the amount of money to buy the shares yourself).  Whereas if the value of the company doubles in value to $2, you will make $1.25 per share for buying the shares at $0.75 each and selling them for $2, which is $125, five times as much profit - even though the value of the share only doubled giving a regular shareholder twice as much value rather than five times as much value.  However, if the value of the company falls to $0.50 instead, the options are relatively worthless because nobody wants to pay any money for the right to buy a share for $0.75 which is only worth $0.50, because they could just buy the share itself for $0.50. This means the optionholder may have lost all their value while the shareholder has only lost half their value.

Typically if you are granted some share options, or given some shares, they only 'vest' (i.e. become yours to keep, in the event you stop working for the company) after some minimum service period, and there may or may not be some special tax perks depending on whether the share ownership scheme is recognised and approved by HMRC. 

So it may be that you have to pay tax on the value of the shares or the options when you are given them (because the company is giving them to say thanks for working for the company, just like they give you a pay packet), or you may have to pay tax on the value of the options when they actually vest (because that's the point they are actually yours to keep, and could be cashed in), or it may be an approved scheme where the company is allowed to give you free shares or let you buy them for a discount (by exercising an option) if you have been working there for x amount of time and in the scheme long enough without you having to pay tax and NI on the value of what you've been given.


And once you actually have the shares, there will be capital gains taxes to pay if you later sell the shares or options for more than you paid (or if you exercise the options that you own to buy the shares cheaply and immediately sell them).  If the shares or options are in a foreign parent company it may be more likely that the share scheme is not HMRC approved and the taxes higher than they might be if it was a UK public listed company with an HMRC approved scheme.

She reckons her company are not public, so that may make it easier,

It makes it easier because if there is no public market for the shares, her opportunities will be quite limited because she can't sell the shares or options via the stock exchange for a market price and there may not be anyone willing to buy the shares from her, so any decisions she has to make will be purely based on what opportunities the company are presenting to her.

It makes it more difficult because there is unlikely to be any information in the public domain which we could read to tell you how the scheme works or what our opinion is of the value or potential future value of a share or option in the company.

My opinion was to cash out more than you might normally want to because of the current global climate.  That made sense,

A bird in the hand is worth two in the bush. If the company is giving you something of value and you can take it in cash, then taking the cash gives you certainty. If you own a large amount of value in company shares and options and then the company has a hard time and the shares reduce in value or become worthless at the same time as you are laid off because they would prefer to have fewer employees or can't continue in business, then you would be quite distressed to lose your nest-egg and would wish you have taken the cash.

Also if she cashes in some of her shares now, although she might need to pay income tax and NI on the value of what she gets given for free, here may be relatively little capital gains tax on any 'gains' (on the shares or options being sold for more than the value they were worth when she got them). Because everyone gets an exemption on the first £12k of capital  gains each tax year, so selling some now and some later might mean that all of them could be covered by annual capital gains exemptions this year and next, while not selling any now and then selling them all at once later would perhaps mean that only a smaller portion could be covered by an annual exemption. So selling little and often rather than all at once, can reduce some types of tax bills. 

However, if the company is not public and is not being sold or going public now, the value that she gets by cashing out now might be a great deal lower than when it does eventually get sold to a third party or listed on a public stock exchange, so she may be kicking herself for 'cashing in' rather than holding on for a massively better long-term opportunity.

Also, if the 'current global climate' is causing uncertainty in the value of companies in her industry sector (or her company specifically due to poor financial strength) then the shares or options over the shares may be worth a relatively low value temporarily, meaning that it may be the worst possible time to 'cash out' for some current approximation of market value, rather than holding onto the options or the shares until they are worth much more later, after the company has proved that it can survive and grow.

but then the choice of shares over stock options and tax implications made it difficult to work out a sensible balance.
I appreciate nobody may know the answers, but I would hope that this is not completely unusual!

It's not unusual for people to not fully understand the best course of action when they have some opportunities to cash out (or buy more) shares in a company and whether to exercise their options now or later.

As you can imagine: if all you have told us is that she has some decisions to make 'on shares and stock options in terms of cashing out and re-investing' in a private, non-public company that isn't listed on a stock exchange - without telling us what those choices are, just that there is some unspecified choice of shares vs options to make, and some tax implications that you haven't told us, and you haven't given any hint on what the company does or what the prices or amounts involved are, or whether they will be around in a year's time, or whether she will continue to work for them and whether she is likely to get more shares or options given to her in the future, and we don't know how much this is all worth in the context of the rest of her savings and personal investments...

.... then it is literally impossible for us to give you any help with the decisions for which she is, in turn, asking your help.

The answer to "what is the actual decision that needs to be made", and all of the information we would use to help make that decision if we were in her position, are things that she knows or that you know, and that we do not know at all.

dunroving

Your partner is pressurising you to help her make decisions on how to invest, even though you don't feel confident doing so?
Maybe suggest she uses an IFA.

bowlhead99

dunroving said:

Your partner is pressurising you to help her make decisions on how to invest, even though you don't feel confident doing so?
Maybe suggest she uses an IFA.

I read it as the OP and his/her partner both work for companies where they have share options or a share ownership scheme with their employer (which is not a public company) and are considering whether to cash in what they have or potentially invest more (or perhaps exercise the options to buy shares instead of continuing to hold the options - it isn't clear).

Nobody is really going to appoint an independent financial adviser to help them decide whether to cash in some employer share options are they? Private company shares are not regulated investment products so whether to hold them or cash them in is a personal/business decision, and the tax consequences are generally summarised by the employer for you (though there is usually a caveat that if you need specific advice for your personal circumstances in relation to tax, you should speak to a suitably qualified tax advisor).  I do get that finance is complicated for some people so I suppose the OP might be better to tell his other half to see a professional adviser rather than just say 'i reckon, .....' without really understanding the concepts involved.   But for relatively small holdings, the advice cost could be pretty big in relation to the values involved.