When Should I Exercise My Company Stock Options? | Ask a Savant Financial Advisor
Transcript
Today I’m tackling a question that keeps many executives up at night: “When should I exercise my company stock options?” Let’s face it, this can be a complicated decision. You might be wondering if you should hold onto the stock after buying it or sell it right away. There’s also the question of timing – when’s the best moment to strike? Not to mention the tax implications!
The high-level overview I’m providing today can help you learn the important factors that may impact your decision, but before we get started, I want you to go to savantwealth.com/guides and download our Financial Advisor Evaluation Checklist. You may want to consult a financial advisor to help guide you personally and our checklist helps makes it easy for you to find the right fit. Now let’s get started.
You may be hesitating on your decision because you’re worried about the tax implications. One big misconception is that there’s a “magic tax-minimizing moment” to exercise your options. While taxes are a factor, they shouldn’t be the only one driving your decision.
Generally speaking, it’s advisable to wait as long as possible to exercise, especially if you’re confident about your job and the company’s future. In an ideal situation, the stock price continues to grow, and you exercise at an optimal point with the most in-the-money value. While taxes may be higher, your net proceeds may be that much greater! But be sure to read the fine print of your grant agreement. Often, companies only give you 90 days to exercise vested options after your employment ends.
So, how do we approach this more strategically? Here at Savant our goal is to help by first understanding the economics of the options themselves. There are objective ways to measure their value, and that information should be the foundation of your decision, not just the tax consequences. In fact, there are four main factors which affect stock option values: (1) time until expiration, (2) in-the-money value, (3) expected volatility of the stock, and (4) the risk-free rate of return. The right financial advisor can help you evaluate your numbers.
Ultimately, don’t get stuck in analysis paralysis! Consider seeking guidance from a financial advisor who specializes in stock options. They can provide a neutral perspective and help you make informed, strategic decisions for your unique situation.
My name is Matt Witter and I am a financial advisor with Savant Wealth Management. If you have company stock options and aren’t sure what to do with them, I encourage you to get in touch. Let’s figure this out together.
Matthew P. Witter
Financial Advisor
CFP®, CEP, ChFC®, AIF®