FW: How many worthless stock options do you have?

[david -dot- locke -at- amd -dot- com]

It's how a software vendor gets you to work for nothing, and most of the
time they amount to nothing. You would have to work for ten software vendors
before you got yourself a real wealth provider.

Stock options are contracts that entitle you to buy a specified number of
shares for a specified price. They are granted to you by your employer. The
typical stock grant is for some number of shares given to you equally over a
number of years. This is called the vesting plan. A vesting plan might let
you vest quarterly after your first year. 

The purpose of stock options is to let the vendor save money when they do
not yet have a product or revenues, and to keep the employee around for a
long time. 

A typical contract might be 100 shares over five years. 

Grants in private companies can split more than grants in public companies.
The total value of the shares are supposed to equal the valuation of the
company. If the company retains earnings, they split the shares by some
multiple so the shares can represent the increased value of the company.
This happens annually when a company has generated revenues. 

When a stock grant splits, the cost of the shares are divided by the
multiple. And, the price of the shares are multiplied by the multiple. You
might here something like a 10-to-1 split. If you had the example grant of
say 100 shares at $2.00 per share and you had a 10-to-1 split, you would now
have 1000 shares at $.20 per share. This is really neutral until a company
goes public. The day after a split in a public company, any change in stock
price is amplified by the split. So if a share goes up $.10 and it did a
10-to-1 split, you are really getting a $1.00 per share gain. 

A lot of companies do not offer stock options, or pay cash bonuses rather
than retain earnings. Make sure they retain earnings. Take a grant that
still gives you enough money to live on. I took too large a grant the last
time. If you do that, the money derived from the sale of the stock will only
let you catch up on your finances, instead of putting you ahead. 

If you were something other than a TW, the company might offer you a
percentage of total holdings deal instead of a number of shares deal. Always
take a percentage rather than number, because the company can split at any
time and then number would be a lesser percentage. TWs are not usually
essential personnel. The stock grants given the typical employee is washed
out be the huge number of stock options given executives. 

When you sell your grants, you can go straight to cash. This does not let
you take a capital gain tax break, but it is simpler. The income is reported
as NON-ISO, no withholdings are made, and the gains are reported on your W2.
You should pay the quarterlies on time and fully. I haven't so now I get to
pay extra every month for the next two years. If you go to stock, you have
to calculate your AMT, which gives you a tax break in subsequent years.
Then, you have to decide on the tax basis for sale of those shares. Get a
CPA at this point. 

David



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