| BUSINESSWEEK ONLINE : MAY 31, 1999 ISSUE | ||||||||
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| BUSINESSWEEK INVESTOR
Making the Most of Your Stock Options You've got more clout than you think in negotiating a package Are stock options the currency of choice when it comes to your compensation? They are for William Kurtz, 42, chief financial officer at Scient Corp. in San Francisco. This year, Kurtz will make $209,135 in salary and bonus. But that's nothing compared to the $18.8 million his stock options were worth after the Internet consulting firm did an initial public offering on May 14. Kurtz is one of an estimated 8 million Americans--about 8% of the private, nonfarm workforce--who now have options that give them the right to purchase their employer's stock at a preset price after a specific date. Only 1 million held options back in 1992, says nonprofit researcher the National Center for Employee Ownership. As options have proliferated, they have become something to be negotiated along with salaries and raises. And the size of an option award is only the beginning. You can now ask for options packages that include protection against a takeover, termination, a falling stock price, and more. There typically is more room to negotiate before being hired and with companies that are too new to have formal options policies. ''When you're a job candidate, you have tremendous bargaining power, especially if you have scarce skills,'' says Andy West, president of WestWard Pay Strategies, a San Francisco consulting firm. But with the job market tight, employees already on board and those at established companies may be able to make special demands, too. Before you start to deal, understand how options work. They can't be converted into stock until they are vested--or made your property. That often occurs over three to five years. After vesting, you have the right to exercise options by buying stock at the predetermined price. If the stock currently trades above that, you get it at a discount. If not, your option is worthless. Options come in two forms: nonqualified and incentive stock options (ISOs). The primary difference is tax treatment. Say your company's stock is trading at $150 per share and you have an option to buy 2,000 shares at $100 each. If you have nonqualified options and want to exercise them, you must fork over the $100-per-share price, plus income taxes on your $50-per-share profit. If the stock is later sold for $200, you pay the long-term capital-gains rate of 20% on the additional $50 in profit. You'd get a better tax deal on ISOs. No tax is due upon exercise. Instead, if you hold the stock for at least a year after exercising, you pay the long-term capital gains rate on the difference between the sale and purchase prices. ISOs are often reserved for top execs. No matter which type you have, many companies offer ''cashless'' exercises. A broker retained by the company buys the stock and immediately sells it. The employee gets the difference between the exercise and purchase prices, minus taxes. Before you start bargaining over options, check out a plan's vesting timetables and what happens if you retire, die, are disabled or terminated. Then, value the options to make sure you're getting more than you're leaving behind at your old job. Use your knowledge of the company's prospects to forecast the stock's annual growth rate. If you don't have a feel for this, look up the stock's track record. Privately held companies should be able to give you similar data. Then, project how much your stake will be worth when you plan to sell. Ask whether you can expect to receive future awards and figure those in, too. If the value is lower than your current package, you have leverage to demand more. Although most companies have formulas that govern the number of options employees are eligible to receive, you have room to negotiate there, too. For instance, companies often compensate recruits for the value of nonvested options left at previous jobs with a bonus or more options. And employees jumping from proven companies to startups should receive a premium for the risk they're taking, says Greg Williams, a partner at the Irvine (Calif.) office of law firm Brobeck Phleger & Harrison. CRACKS. Although it's harder to negotiate other terms, ''it's not unheard of,'' says West. Hotshots may be able to wrangle dilution protection guaranteeing them a fixed stake in the company, even if it issues more stock, says Tim Sparks, a partner at the Palo Alto (Calif.) law firm Wilson, Sonsini, Goodrich & Rosati. And while departing employees typically have 60 to 90 days to exercise vested options, companies can agree to accelerate vesting. That would have helped Tom Taulli, a market analyst at EDGAR Online. He saw more than $6 million in options vanish overnight when Go2Net's Silicon Investor Web site fired him from his columnist's job in March. Taulli says he was let go for no reason; Silicon Investor declines comment. But Taulli says EDGAR gave him options on a number of shares in line with what he lost at Silicon. If you're taking a chance on a laggard company, consider asking for stock instead of options. While a falling stock renders options worthless, even low-priced stock has value. Or ask the company to cut the exercise price of worthless options, a practice known as repricing. After the stock market tumbled last summer, scores of companies repriced, including Ziff-Davis Publishing. Other perks get even harder to negotiate. Some companies allow the transfer of options to family members to cut estate taxes. Others permit employees to effectively exercise options before they vest, locking in a lower tax bill. Insiders do this if they have low-priced stock options and are confident the stock is set to soar, as often occurs when a company goes public, says Anne Yamamoto, a partner at Frank, Rimerman & Co., a Menlo Park (Calif.) accountant. If your plan is complex or you have a lot of money at stake, consider hiring a lawyer or an accountant. They can help you gauge your worth by telling you what others with similar skills have received and suggest ways to slash taxes and avoid the onerous alternative minimum tax, which can be triggered when ISOs are exercised. And if options leave your portfolio heavily concentrated in company stock, devise a diversification strategy. Most people simply sell company stock at regular intervals to keep their portfolios in balance. But if you have at least $2 million in stock, you can probably afford to buy derivatives, notes Craige Bertero, an associate in the private client group at BT Alex. Brown in San Francisco. To be sure, most companies ban such practices because they undermine the purpose of options, which tie employees' fortunes to that of their company. But at companies that permit derivative strategies, some senior execs enter into swaps with their banks. They retain ownership of their company stock but trade its total return for that of a diversified portfolio that might include a Standard & Poor's 500-stock index fund. If you have the clout to bargain over options, don't be shy. But understand your company's option plan first. With options accounting for a rising portion of employee pay, you can't afford not to sweat the details. BY ANNE TERGESEN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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