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GENERAL QUESTIONS
YOUR STOCK OPTIONS
WHAT ARE MY OPTIONS WITH MY OPTIONS?
TRANSACTION DETAILS
GENERAL QUESTIONS
What is a stock option?
A stock option is a type of employee benefit that allows employees to benefit from the success of their company. Simply, it is a contract between you and your employer whereby your employer guarantees you the right to buy company stock directly from the company at a specified price within a specified time period. This contract is subject to an array of restrictions.
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What is ESPP? What are Employee Stock Purchase Plan Shares (ESPP)?
The ESPP Plan is your employee stock purchase plan. These are shares you are purchasing from the company through your paycheck, sometimes at a slight discount to current market prices. These shares are sent to you directly from the company's transfer agent, usually every six months.
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Are stock options different from employee stock purchase plan shares?
Stock options are completely different and separate from your ESPP shares. Stock options may be granted at the beginning of your employment and then at various points in your employment. These shares vest, or effectively become exercisable, as you continue to work for the company. They are not shares owned but rather shares that you may own if you choose to exercise the option and pay the exercise price. ESPP shares are shares that you purchase regularly at a discount and own outright. You may sell these shares at any time as long as there is not a current blackout or trading window restriction (see below). In contrast to the stock option, as you own shares purchased for the ESPP, there is no expiration date for shares purchased through the ESPP plan. You may sell your ESPP shares through Conifer and we are more than happy to assist you with your ESPP.
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Can I hold my ESPP and exercised Employee Stock Option Plan (ESOP) shares at Conifer Securities?
Yes, Conifer is happy to hold both ESOP and ESPP shares in your Conifer account at no charge.
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What is a grant date?
Your grant date is the date on which the option was given to you. If you have been with an employer for multiple years, you may have more than one grant date, corresponding to each specific date on which new options were given. Many plans vest on a four year schedule where you have no options that are exercisable until the first year after the grant date. After one full year of employment, 33% of the granted option is exercisable...after two years, 66% is exercisable, and after completing three full years of work, 100% of the option is exercisable. Your grant schedule may be different from above. Please check your company's specific plan or contact Corporate Services to determine your vesting schedule.
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What is "to vest" and what is a vesting date?
Vesting refers to your options that are exercisable. Remember that shares granted are not exercisable until at least one year following their grant date (in most cases). After one year, 33% becomes exercisable, or vests. Each year 1/3 of your options vest or become exercisable such that after three complete years of work, you will be able to exercise 100% of the option as your option is fully vested. Please check with your specific company's option plan.
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What is my "exercise price" or "strike price"?
Your exercise price or "strike price" is the price at which the company will sell company stock to you. Hopefully, your exercise price is lower than the current market price, allowing you to buy the stock from the company at a discount, and sell the stock in the market for a profit. If your exercise price is lower than the current market price, the option has value and is termed "in the money." If your exercise price is greater than the current market price, it may not be beneficial for you to exercise the option. Options priced higher than the current market are termed "out of the money."
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What is an "in the money" option?
An "in the money" option is an option that has an exercise price lower than the current market price. For example, if you have options granted at $5 and the stock is trading at $7, the options have two dollars of value and are termed "in the money" (see exercise price).
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What is an "out of the money" option? What is an "underwater" option?
An "out of the money" option or an option that is termed "underwater" is an option that has an exercise price greater than the current market price (see exercise price). If you have options granted at $7 and the stock is trading at $5, these options have no value and are termed "out of the money". This makes sense as you would not exercise an option at $7, essentially paying the company $7 for 1 share of stock if you can purchase it in the market at $5.
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Are my stock options the same as listed stock options on the CBOE?
No, stock options from your employee are completely separate and quite distinct from equity options that are traded on the Chicago Board of Options Exchange or any other exchange.
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What is a "trading window?" What are "Blackouts?" Why should I worry about "Blackouts?"
"Blackouts" or "trading windows" are time periods for your company and determined by your company in which you are prohibited from buying or selling company stock, including exercising an option. These time periods are company specific with many windows closing around the time sensitive news is released, like quarterly earnings or significant company developments. This window can be company wide or job specific. If you are subject to possible blackouts, please let Conifer Securities know. Given that information, we will ensure you do not violate your company's trading policies and blackout restrictions. If you believe you are subject to a blackout, please consult with your company or Conifer Securities.
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YOUR STOCK OPTIONS
For how long are my options valid? What if I leave the company? What if I am fired for cause?
The specific terms of your stock option may be found in your stock options agreement but most options are valid for a period of ten years from the grant date, as long as you continue to be an employee. Once you leave the company, your options will expire in a specific time, which is usually referenced in your stock option agreement. In general, employees have 90 days to exercise their options from their termination date (please check with your specific plan). Employees fired for cause may forfeit all granted and vested options.
If you leave the company, all available and vested options must be exercised before a specific time period, usually, but not always, 90 days from the day you left the company. However, vesting stops as soon as you leave the company. Therefore, from the day you leave the company, no additional shares will become exercisable. You must exercise the shares you do have within a specific time period, usually 90 days.
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What are ISO (incentive) options? What are NQ (non-qualified) options?
ISOs, also termed "incentive stock options," refer to options that qualify for special treatment by the IRS given certain holding periods are met. An incentive option can only qualify as such under a certain set of conditions and can provide certain tax advantages and disadvantages. All options that do not qualify for this special treatment are termed nonqualified options. Non-qualified options are always taxed at the time of the exercise.
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Why should I care if I have Incentive or Non-qualified stock options?
As mentioned above, the tax treatment for the corporation as well as individuals is different for ISOs and NQs. As such, although any exercise triggers a taxable event, the corporation will not withhold taxes up front for Incentive stock options. The company will require taxes up front for an exercise of Non-qualified stock options. Regardless of whether the company withholds taxes, exercising a stock option, whether ISO or NQ, triggers a tax liability. In addition, there are limits to the number of options you can exercise as ISOs and continue to have them treated as ISOs by the IRS (currently $100,000.00 in grant value). We recommend you consult with your tax advisor prior to making a decision to exercise a stock option, whether it is an NQ or an ISO stock option (see below for a brief overview of the taxes on ISOs and NQs).
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WHAT ARE MY OPTIONS WITH MY OPTIONS?
What is a same-day sale? What is a cashless exercise? Can I exercise and sell without any out-of-pocket expense?
A same day sale, also termed a cashless exercise, is a method of exercising your employee stock options without any out-of-pocket expense. In a cashless exercise, you simultaneously sell your shares and exercise your stock option, realizing the value of the difference between the two. Rather than paying for the exercise then receiving the proceeds from the sale, you simply borrow the funds to exercise the option. Once the sale settles, you receive the difference between the sale price and your exercise cost, less any transaction fees which may include margin interest.
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Are there any risks in executing a cashless exercise?
A cashless exercise can reduce the risk in exercising a stock option as you lock in sale price as the tax liability is triggered. You essentially produce enough proceeds by locking in your sales price to cover the tax liability at the time the tax liability is generated. Any further movement in the stock has no effect on your transaction. This is different from an exercise and hold, where you trigger a tax liability but do not execute a sale. Should the stock price decline significantly while holding the stock, you may have a tax liability that is greater then the value of your held stock.
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What are my alternatives to a cashless exercise?
If you choose not to do a cashless exercise, you may do an outright exercise and hold. In this scenario, you will pay the full purchase price plus taxes to the company to pay for the shares. They will send you the shares, which you may hold until you choose to sell. This means you will have paid for the shares plus taxes out of your pocket, and you will own all exercised shares as dividend paying common shares. The final option is a combination of the cashless exercise and exercise and hold whereby you sell just enough shares to pay for exercising all of your shares plus taxes to the company. In this scenario, all proceeds from the cashless exercise of a portion of your options will be used to purchase the balance of the shares. At the end of the day, you will have a number of dividend paying shares without having to deposit any cash out of pocket.
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What is an exercise and hold?
This is the traditional way of exercising an option. You send the exercise funds to the company plus any taxes due, then they send you the shares. Once you receive the shares, you may hold them or sell them at your discretion (trading windows still apply). If you sell these shares less than one year from the exercise date, you may trigger a disqualifying disposition.
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Are there any risks to exercising and holding?
Yes there are many risks associated with an exercise and hold. The most common is a decline in the stock price of the exercised option. When you exercise an option, you are taxed on the spread between the exercise price and the current fair market value of the stock, often the closing price of the stock on the day you exercise. This tax liability is triggered when you exercise the option, regardless of whether or not you sell. If you do not sell, and the stock price declines significantly, you may have a tax liability greater than the value of the stock you are holding.
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TRANSACTION DETAILS
How do I proceed with an exercise?
Once your account is open (to do this please proceed to the Tour) you need to contact Conifer at 415-677-1652 to give your specific sale instructions. Once the sale has been made, it will take about five business days to settle the sale, after which we will send your funds via check or wire transfer.
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How long does the transaction take?
It usually takes five to seven business days from the date of an ESOP sale until we are able to cut a check with the proceeds, given all documents are on file. We recommend you open the account (no fees) in advance of an exercise to allow for the quickest possible settlement.
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How can I sell my stock? What type of sale instructions may I give? What is a market order? What is a limit order?
In order to sell your stock, you must contact us and place a sale order. Many people choose to make a sale "at the market" or place a "market order." This instructs us to sell the shares at the best available price in the market at that specific time or you may place a limit order (PLEASE NOTE – LIMIT ORDERS MAY RESULT IN A MARK DOWN on NASDAQ STOCKS). This allows you to choose the price at which you want to sell your shares. If the stock price reaches your limit price, trading at that price with sufficient volume, you will make the sale. Most limit orders are placed Good Until Cancelled, or GTC. This means we will keep your order on the trading desk either until we make the sale, or you instruct us to cancel/change the order. To place an order, please contact Sean Miot or Melissa De Lorme at 415-677-1652. Please do not leave orders on voicemail or in email as confirmation of authenticity must be obtained prior to executing the order. As such, any orders left on voicemail or received via email will not be executed until verbally confirmed.
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Are there any risks to placing a limit order?
When you place a limit order, you are waiting for the stock to move higher. If, while you are waiting, the stock moves lower, you have missed the opportunity to sell at the then current (and higher) levels, waiting for a higher price. This is a risk that will always be present for limit orders.
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What are the transaction fees?
Transaction fees are the commission and the margin interest.
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What is the commission?
Commissions depend on whether your company is a NYSE listed company (stock symbol 3 letters) or a NASDAQ company (stock symbol 4 letters). For listed companies, employees will pay 10 cents per share with a minimum of 250 shares. If you sell less then 250 shares, a flat $25.00 fee will apply. Large block orders and restricted stock sales (25,000 shares or greater) may negotiate commissions on a case-by-case basis. For NASDAQ companies, employees will not pay commissions for orders placed at the market as long as Conifer is a market maker in your company stock.
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Why is there a margin interest charge?
Margin Interest is the cost of doing the transaction cashless. In effect, a cashless exercise is a loan to you, for the cost of the options plus any taxes due. This loan is usually carried no more than three business days and does not account for more than a small percentage of the transaction. If you wish to have a calculation made as to the estimated charge for this loan, please contact Corporate Services.
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