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Take The Stock Options!

© Michelle Hogan

Annie was recently promoted to a senior-level position at her company. The company, a pharmaceutical manufacturer, announced its intentions to "go public" within the next year, and so in Annie's new benefits package she received a certain amount of stock options. "What does this mean?" she asked. "Will I get rich when the company goes public? Do I have to fork out a lot of cash in order to buy my options right away?" These are all excellent questions, and with the huge amount of new startups and companies "going public", I receive many questions related to these matters.

So, what are stock options? Well, in a nutshell, options are a way for your employer to provide you with an extra benefit or compensation with the goal being for you to produce more for the company. So basically, if you own a portion of the company, you will want to work harder to make the company's stock price go up. The company has given you the option to buy stock in your company at a certain price, the strike price, for a certain period of time, usually up to 10 years.

In essence, if you received the option to buy 1,000 shares of stock for $20.00/share, and the stock is selling for $50.00, you can exercise your option, sell the shares and now you have $30,000. Of course this is very taxable (capital gains) for you, your company receives a $30,000 tax deduction and you never moved a penny out of your checking account. Even better, hold the option and hopefully the stock price will rise (work really hard!) , your worth will continue to grow, and your company will get a very large tax deduction without the outlay of cash.

Remember, it costs nothing to wait. If your stock goes to $100.00, splits or better, you can still exercise your option at $20.00 and pocket a very large, very taxable sum.

So what are your options?

Well, if you are lucky enough to receive them, you can do one of three things.

1. The "no-cash" turnover: You can do this either immediately or later on in your option term. You never actually pay for the shares, you buy the shares at the time you sell them and your broker offsets one against the other, returning the difference to you (less commission). This is a great idea if you haven't the cash to spend when the options are given. It will also enable you to re-invest the money and diversify your portfolio, especially if you never had a portfolio before.