After last week’s newsletter, I received a lot of questions about the strategy behind exercising tech stock options.
“After I exercise my tech stock options, then what happens?”
“If the price of the company shares fluctuates, how does that affect my options?”
“Once I own the shares after the Incentive Stock Option (ISO) exercise, then what should I do?”
Take Advantage of a Down Market
Market performance this year has not been what any of us hoped for, but it’s a great opportunity to evaluate how you can make the best of it!
An area to explore is exercising your stock options. This applies to both ISOs at privately held companies as well as publicly traded ones. Let’s find out how to make the best of your situation!
ISOs for Private Businesses
Your tech company may recently have gone through a “down round,” finance lingo for when a private company offers shares for sale at a lower price than the price in a previous financing round. For instance, a fictitious company named Pecunia raised a Series C at $20/share two years ago and its most recent Series D funding is at $15/share.
When exercising Pecunia ISOs you get more for your money because you can own more of the business at a lower price ($15 vs. $20). In the future, when the share price is a lot higher than $20, you will have a much larger gain because you purchased the shares at $15, instead of $20.
Typically, ISOs are subject to the Alternative Minimum Tax (AMT). In this case you will be able to exercise more shares before reaching the AMT threshold because the share price is lower. The AMT is determined by the difference between the exercise price and the share price. With the share price at $15, you can exercise more options before having to pay the AMT.
ISOs for Public Companies
Many public tech companies’ shares have trended downward this year as well. Although not deemed a down round, the concept is very similar. Instead of getting updates during financing rounds, you get price updates every split second the stock market is open.
The same ideas apply here. You can buy more of your business at a lower price when exercising options and you will be less likely to pay the AMT. Moreover, you will have an opportunity for a larger gain in the future because you purchased the shares at a lower price.
Next Steps for Your Tech Stock Options
It’s a great time to take advantage of what markets have offered you. Make use of lower prices to buy more ownership in the business, and do it in a tax efficient way with ISOs. Questions about how to do it? You can set up a free consultation.