When Do You Exercise Your Options?

Workforce, Jan, 2001 by Bob Rosner

Dear WW:

I have stock options in my company. I was planning on hanging on to them for the long term, because I think the stock will be worth more, but my colleagues are exercising theirs now and it's been "suggested" that exercising our options is a sign that we believe in the company.

What Are My Options?

Dear Options:

Your e-mail reminded me of a story my dad used to tell about my uncle Fred. Fred was fixing a septic tank one day when his brand-new coat fell in. He was disconsolate and spent 10 minutes trying to fish it out. My dad said the coat was lost. Fred said, "The coat? Who cares about the coat? I just want the sandwich that's in the pocket."

Most stock options are like Fred's sandwich--currently in the tank. Unlike the sandwich, though, they're bound to rise again. For advice on how to navigate today's murky option waters, I turned to Bruce Brumberg, the founder of MyStockOptions.com, a free resource about the ins and outs of options.

Take stock of the situation. Don't feel pressure to act. Most stock options give you 10 years to exercise them, Then ask yourself the following questions:

What do the skeptics say? Whatever decisions you make about exercising your options, make sure you use realistic information about the future value of the stock. Talk to the most skeptical person in your finance department; look at how comparable companies are doing; be realistic about the value of the options.

Do you need the money now? If so, you probably want to exercise the options as soon as possible.

Do you want the money for the future? If you don't need the money now, you're probably better off holding the options for two reasons: one) if you exercise them, you'll have to lay out a wad of cash to purchase the stock; and two) once you exercise them, you may owe another wad of cash to Uncle Sam.

What does the fine print say? Before you make any decisions, read the fine print in the option agreement. It probably stipulates your "vesting schedule," or when and how much stock you can buy. Also check out what happens if you leave your job: generally, options have to be exercised within a short time after you leave.

What SHOULDN'T guide your decision-making? Taxes. A personal story: I did some consulting for a pre-IPO dot-com. Believing there were tax advantages to exercising my options early (when the difference in value between the options and the stock would be smaller), I exercised them before the company went public. Now I know why Mr. Brumberg says the tax tail shouldn't wag the options dog. The company didn't go public, and I'm out a wad o' cash.

So sit tight. The market's in the toilet now: it's a bum time to sell stock anyway. But with a plan, you'll be ready to act when stock prices are once again flush.

Bob Rosner is the author of Working Wounded (Warner, 2000), a speaker, and founder of an award-winning

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