Part of my remuneration includes share options
Employee share option plans can be a great way of participating in the potential upside of the company you work for.
An earlier article (include link) provides more detail but in summary a share option provides the right but not the obligation to buy shares before a future exercise date.
The options will usually include a vesting ‘cliff’ of 1 year before you can exercise them to provide an incentive for staff to stay with the employer. Typically, the options will be vested in tranches over a 4-year period.
For example, assuming 1,000 options are granted the vesting schedule may look something like this:
TimeOptions vested<1 year01 year2502 years5003 years7504 years1,000
Moving on up
One day you may be lucky enough to be offered a great new job doing interesting work for a bigger pay package.
There may also be other reasons why we may leave an employer. Taking a career break to recharge the batteries or care for a family member are examples. Unfortunately, people also get fired from time to time if things don’t work out in a job.
Whether it is on your terms or not, leaving an employer can be a big deal when it comes to your share options.
Devils in the detail
As with everything you need to read the fine print in the particular employee share option plan you are participating in to understand what will happen to your options.
However, there are a few general principles to be aware of.
Assuming you leave just after 2 years with the existing employer you will likely have around 50% of your options vested. Commonly plans will provide a window of 90 days within which you may choose to exercise the options and acquire the shares.
If the options are ‘in the money’, i.e., the share price is higher than the exercise price then acquiring the shares may make sense. But you will need the available cash to pay the exercise price. This is where a bit of cash flow planning may be wise when you start participating in a share option scheme, so you have the flexibility to exercise vested options if they are ‘in the money’.
If you have already exercised vested options, you own the shares. Generally, the employer can’t ‘clawback’ shares, but it is not impossible. Careful reading of the plan terms and conditions is important to feel confident that you won’t lose any shares.
Depending on the timeline it may be worthwhile staying on for a period of time to wait for a new vesting period. Assuming a new employer is willing to wait for you of course. Once again this may depend on if the options are ‘in the money’. If not, and you don’t expect them to be ‘in the money’ before the next vesting period then it may be a waste of time to wait.
What about unvested options?
Generally, you will lose unvested options if you leave an employer. Whether this is a good or bad thing will depend on similar factors for the vested options. If they are ‘out of the money’ and you don’t expect them to be ‘in the money’ in future, then losing may not be the end of the world.
Depending on how big a pay rise you are getting with a new employer and the structure of the package forgoing ‘in the money’ unvested options may also be a trade-off that makes sense. Non-monetary considerations may also be important, less commuting time, more hybrid working flexibility for example may be factors that you ‘value’ more than the unvested options.
Private or public company?
The type of company you work for may also be an important consideration. If it is a publicly listed company, then turning shares into cash is always possible by selling on the open market.
If the company is private things may not be that simple. Exercising options may mean you have ‘equity’ in the company, but you may have to wait for an ‘exit event’ such as a buyout, merger, or acquisition before you see the cash in your bank account.
Is important to consider your overall cash flow position and other goals before you allocate your cash to buy potentially ‘illiquid’ shares in private companies.
Don’t forget the ‘T’ word!
Exercising ‘in the money’ vested options may also generate a tax bill and if you need to then sell some of the shares to pay the bill there may also be CGT implications.
Once again, these implications can be managed with good advice from a tax accountant to try and avoid paying more tax than necessary.
That’s a lot to think about
It’s true that receiving some of your remuneration in the form of share options is a lot more complicated than getting paid in cash.
Hopefully the ‘risk’ involved in share options will pay off and this part of your remuneration will be a wealth creator, but it is important to go into these things with your eyes open.
Careful planning to manage future cash flow needs and tax obligations may provide flexibility to take advantage of vested options that are ‘in the money’.
For those of us with the time and inclination doing this personally may make sense but if you need a second opinion speaking with a financial adviser may be a valuable investment of time and money. Good advice can help you make the best decision for you and your family so you can work towards achieving your financial and non-financial goals.
