- How do I get access to liquidity and sell my shares?
- How To Avoid Closing Options Below Intrinsic Value
- Should You Sell Your Company Stock?
- Stock Options FAQs - Fidelity
A stock purchase option, available through an Employee Stock Purchase Plan, gives an employee the right to purchase company stock, sometimes at a predetermined discount from the fair market price. Although the plans are similar, they are not the same. Both kinds of plans can be either qualified for special tax treatment or unqualified. Both can be of great benefit to employees. Both can be offered to an exclusive group of participants as in the case of non-qualified Employee Stock Purchase Plans, or to all full-time employees under qualified plans. Top Q. Stock options do expire.
The expiration period varies from plan to plan.
How do I get access to liquidity and sell my shares?
There are often special rules for terminated and retired employees, and employees who have died. These life events may accelerate the expiration. Check your plan rules for details about expiration dates. Your plan may have a vesting period that affects the time you have to exercise your options.
How To Avoid Closing Options Below Intrinsic Value
A vesting period is time during the term of the option grant that you have to wait until you are allowed to exercise your options. This essentially means you have an eight-year time frame during which you can exercise your options. This is called the exercise period. Generally, during the exercise period, you can decide how many options to exercise at a time and when to exercise them. A stock option just gives you the right to purchase the underlying shares represented by the option for a future period of time at a pre-established price.
Once a stock option has been exercised, it cannot be used again. Dividends are not paid on unexercised stock options. There are usually special rules in the event you leave your employer, retire, or die. The fair market value is the price used for calculating your taxable gain and withholding taxes for non-qualified stock options NSO or the alternative minimum tax for Incentive Stock Options ISO. Blackout dates are periods with restrictions on exercising stock options. Your stock option exercise will settle in three business days. The proceeds less option cost, brokerage commissions and fees and taxes will be automatically deposited in your Fidelity Account.
Think of your Fidelity Account as an all in one brokerage account offering cash management services, planning and guidance tools, online trading, and a wide range of investments like stock, bonds and mutual funds. Use your Fidelity Account as a gateway to investment products and services that can help meet your needs. Learn more. Yes, there are tax implications — and they can be significant.
Exercising stock options is a sophisticated and sometimes complicated transaction. Before you consider exercising your stock options, be sure to consult a tax advisor. Fidelity works to make your exercise-and-sell transaction simple and seamless for you, so it appears to you to be a single transaction.
For federal income tax purposes however, an exercise-and-sell transaction cashless exercise of non-qualified employee stock options is treated as two separate transactions: an exercise and a sale. The first transaction is the exercise of your employee stock options, in which the spread the difference between your grant price and the fair market value of the shares at the time of exercise is treated as ordinary compensation income.
It is included on your Form W-2 you receive from your employer. The fair market value of the shares acquired is determined under your plan rules. The second transaction — the sale of the shares just acquired — is treated as a separate transaction.
Should You Sell Your Company Stock?
This sale transaction must be reported by your broker on Form B, and is reported on Schedule D of your federal income tax return. The Form B reports the gross sales proceeds, not an amount of net income; you will not be required to pay tax twice on this amount. Your tax basis of the shares acquired in the exercise is equal to the fair market value of the shares minus the amount you paid for the shares the grant price plus the amount treated as ordinary income the spread.
- Should You Exercise and Sell All Your Employee Stock Options Right Now?.
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In an exercise-and-sell transaction therefore, your tax basis will ordinarily be equal to, or close to, the sale price in the sale transaction. As a result, you would not ordinarily report only minimal gain or loss, if any, on the sales step in this transaction although commissions paid on the sale would reduce the sales proceeds reported on Schedule D, which would by itself result in a short-term capital loss equal to the commission paid.
An exercise-and-hold transaction of non-qualified employee stock options includes only the exercise part of those two transactions, and does not involve a Form B. You should note that state and local tax treatment of these transactions may vary, and that the tax treatment of incentive stock options "ISOs" follows different rules. Unfortunately, owners who enter negotiations with a potential buyer without a vision for the future rarely conclude the deal.
Put your future life vision in a document, so you can refer to it when needed, and update it as necessary.
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The next question to ask is: What do your stakeholders want from your company? Stakeholders include people whose actions affect the health of the business—employees, other owners, investors, and family members. The goals of these pivotal people will shape the future of the business, and a smart buyer will want to know and agree with their objectives before concluding a deal. Next, you need to establish a value for the business. The entrepreneur has grown their business from an idea into an organization with employees, assets, intellectual property, and a reputation.
A broker will concentrate on the sale, allowing the entrepreneur to continue to focus on running—and maintaining the value of—their business. Once you have an idea of the fair value of the business, solicit multiple bids at least three if possible.
Stock Options FAQs - Fidelity
It is also important to properly market a business that is to be sold. There are internet sites that traffic in helping owners to sell their businesses, but owners need to be prepared to create their own sales materials. At a minimum, a well-formatted, one-page summary is critical, as is a more detailed package for serious bidders.
These materials need to include items such as the sales, profits, and cash flows of the business, as well as a comprehensive description of the business and its assets. Finally, get the business in order before attempting to sell it. Just as a house needs a refresh before a sale, so does a business.
Look for issues that will scare off potential buyers and fix them before opening the books for inspection. Make sure that cosmetic details and repairs are attended to, prepare a thorough inventory and equipment list, and have multiple years of financial data and tax returns on hand. There are several other key details to keep in mind when considering selling part or all of your business.
Remember that it takes time. An initial public offering IPO or venture round of financing takes months to organize, and getting a good price for a private business can take a year or more. Chris Snider , CEO and president of Exit Planning Institute, a national organization that trains financial advisors on the fundamentals of selling a business, says that selling should be treated like retirement and started early. Instead, they treat selling their business like an event approached when they are ready to retire, burned out, or facing an unexpected life change.
Investors are likely to insist on more-rigorous auditing or reporting. Are you ready to walk away? Are you prepared to have new partners questioning your decisions? Having investors in your business makes you legally accountable to others and requires more transparency than a sole proprietor may be accustomed to. Selling even a small part of your business is a serious undertaking.
At a minimum, make sure you are thoroughly prepared and have clear expectations for the process. Selling shares in a private business can be a great way to raise capital, incentivize employees, or bring new talent and ideas into a business, but it requires patience, preparedness, and a willingness to negotiate. The best way to get the maximum value from selling your company is to plan well in advance.
Take a hard look at what your business is worth and solve any problems that could make it sell for less than it should. Then take the proceeds and start on your next adventure.