By |Published On: Nov 13, 2023|Categories: Financial Planning, RSUs|

At a great house party last weekend on Long Island, over passed hors d’oeuvres of goat cheese stuffed mushrooms and sparkling water with a lime twist, I met a friend of a friend, Lucas. Lucas is handsome, with striking green eyes, and a pleasure to talk to.

After a lengthy discussion, he informed me that he’s worked at a large technology company for seven years and owns non qualified stock options but he wasn’t really sure how they worked.

A few days later, we spoke and we reviewed his non qualified stock options (NSOs). We went through the specifics of each option lot and how he felt about them and what he wanted to do.

You may think you won’t make this mistake of not tracking your option ownership for seven years but here’s another version.

My Costly Mistake with NSOs

Many moons ago, I had NSOs and I didn’t monitor them either. Over time, the cost to use the options kept increasing. I didn’t know this. If I took the time to do the work, I could have used the NSOs to my advantage for a windfall. I never exercised them and they became worthless.

It was an expensive mistake – a down payment for a beautiful house just like the one where I met Lucas, a Tesla, or family travel to an untapped part of the world.

For NSO holders, here are some basic steps to help you understand the specifics of what you own, how to use the options, and know what the tax implications are.

1.) – Round up Equity Grant Data and Understand the Vesting Schedule

First, there are many dull pieces of information to put together:

  1. Equity grant document
  2. Vesting schedules
  3. Holding report
  4. Sales history report
  5. Exercise history report

Then, the important information to gather from these documents is:

  1. The cost to buy the option, how much time do you have until it expires, and what is the gain?
  2. This is a multi-year project because options are very complex and there can be tax implications from making poor decisions.

2.) – Organize Historical NSO Exercises and Prepare for Next Exercise

Next, there is additional fact gathering on the front end:

  1. Holding report
  2. Exercise history report

Subsequently, here are the considerations from these documents:

  1. The number of NSOs and your cost to exercise them
  2. Supplemental tax withholding – the mandatory tax withholding on the difference (the spread) between value of shares and your lower cost of shares
  3. 83(b) election – an election within 30 days of early exercise where you pay taxes on the spread in year of election rather than the year of vest

With this information, we can confirm key event dates and prices and help you think about choices available to you.

3.) – Collect Historical NSO Sales and Prepare for Next Sale Opportunity

In the third and final step there is additional information to collect:

  1. Holding report
  2. Sales history report

The ultimate details to contemplate:

  1. The grant from which exercised options were sold
  2. The number and sale price of options
  3. Short term and/or long term capital gains taxes

Given this information, when does it make sense to sell exercised NSOs or do a cashless exercise? We look at the options amount and understand what the sales considerations look like, how they align with what you want to do, and the best way to achieve liquidity.

There is a lot of document gathering in these steps and it’s necessary to collect it so you know exactly what you own. From there you can make the best decisions with your NSOs.

You can transform your whole life and attitude about money and not miss out on a house, a sweet ride, or a luxurious vacation.