Notice of Grant of Stock Option?
February 25, 2014 5:24 PM   Subscribe

I've received a "notice of grant of stock option" from the company I work for, with a place for me to sign.

I don't really get how this works, i.e. are there any (tax?) implications for me if I just sign the thing? And if I never "exercise" my option, if this is that kind of option? (Note: I am employee one-zillion, so I don't think there's a lot at stake, here? Unless the company gets sold or goes public and even then?)

Is there any reason not to just sign this thing?

Can someone point me to a reputable link that will help me relatively quickly understand this thing?

Which is the correct professional to help me understand this document? (CPA?) What should I expect to pay them? Can this same professional do my taxes so I can kill two birds with one stone?
posted by zeek321 to Work & Money (13 answers total)
Without knowing more (seeing the documents, etc.) no one here can really give you a good answer. There are various kinds of options granted to employees, which have different tax implications. You really need to speak with a CPA or a tax attorney before you sign any document that relates to employee stock options and fully understand what your liability, if any, is.
posted by dfriedman at 5:28 PM on February 25, 2014

You need to speak to someone versed in tax law in regards to options. My foggy recollection is that during the last internet bubble people owed tons of money in tax on options they couldn't yet exercise but had huge paper gains. But I could be wrong.
Its worth spending small amounts of money to understand huge money implications.

Since its tax season, earlier is probably better than April for getting the question answered.
posted by TheAdamist at 5:56 PM on February 25, 2014

Have you tried just asking around at your company for the answer to this? There's no reason they would want to stick you with a huge tax burden unawares.
posted by ch1x0r at 6:02 PM on February 25, 2014 [1 favorite]

IANAL, but I have hundreds of thousands of stock options.
Your options are not taxable at the grant, taxation begins when you exercise them.
There is not any reason to not sign the thing.
posted by BabeTheBlueOX at 6:16 PM on February 25, 2014 [9 favorites]

Your options are not taxable at the grant, taxation begins when you exercise them.
There is not any reason to not sign the thing.

This is correct. An "option" is just that, an option to buy at some future date at a certain price. You are not taking ownership of anything by signing. In fact, before they vest (vesting usually begins a year from your start date), you cannot buy any of them. If it's a non-public company, there's no reason to buy them until the company is sold or goes public or you leave, because you'll just end up paying to hold stock that has no value until the company sells or go public.

And yes, your instinct is correct that almost all start-up/small company "sloptions" will never be worth anything. Also note since shares of a pre-IPO company are basically fictional creations, the company owners can invent new shares whenever they want, thus diluting the value of yours.

But you never know, and there is no reason at all not to accept the options.
posted by drjimmy11 at 7:41 PM on February 25, 2014

(I am not a lawyer or accountant, just a guy who has had plenty of sloptions.)
posted by drjimmy11 at 7:42 PM on February 25, 2014

1) Sign the thing.

2) Show the thing to a tax accountant, who will explain to you under what circumstances you may one day need to pay taxes.

3) Sign the thing.
posted by zippy at 11:47 PM on February 25, 2014

Your options are not taxable at the grant, taxation begins when you exercise them.
There is not any reason to not sign the thing.

This is correct.

Actually, this is not always true. If the options have a readily ascertainable fair market value, they are taxable upon grant as ordinary income. Many (if not most) options do not have a readily ascertainable fair market value. However, without knowing all the details of the situation, no one here can say whether that is the case here and whether OP is taxable on the grant of these specific stock options.
posted by melissasaurus at 5:28 AM on February 26, 2014

I got stock options at MCI WorldCom. Let's just say they were never exercised.

Call HR or the stock custodian and ask them about the type of grant and if there are tax reprecussions that you need to know about. They should be able to give you a decent overview of what you've got there.

If what they tell you, leaves you with more questions. Seek the advice of a competant tax attorney.
posted by Ruthless Bunny at 6:11 AM on February 26, 2014

As folks have said above, the likely scenario is the options are not taxable at grant. But you should verify that with your company, or better with your own accountant. You should also do a bit of tax planning now; you may want to early exercise the options. Also by signing the option grant you are possibly agreeing to employment terms, you may want to review those now. (For instance, verify the number of options corresponds to the percent ownership in the company you were expecting.)

This recent engineer's guide to stock options is a good overview of how options work in the US. In the past (like years ago) I also recommended Fairmark's information, but I haven't read it in a few years so am not sure if it's still accurate.

If you anticipate those options some day being worth more than, oh, $10,000 you should probably hire an accountant to review them with you now. You don't need a big fancy accounting firm, any independent CPA with a passing familiarity with local taxes and options should be able to tell you the basics. If you have someone preparing your taxes already I'd expect them to do this for you as a courtesy. If you need a CPA, I'd expect to pay them for 2-3 hours of work plus the promise that you're hiring them to do your taxes. Note that right now is not a great time to be hiring accountants, it's seven weeks to April 15. It will get harder in a month.
posted by Nelson at 7:55 AM on February 26, 2014 [1 favorite]

One reason not to sign is that a fair number of companies hide non-compete clauses in stock options. Depending on the country/state you live in that could be problematic.
posted by BenevolentActor at 8:38 AM on February 26, 2014

My company (in the past) has changed employment agreements with stock option grants, as BenevolentActor mentions. So other than the options, read what else you're signing up for by signing the paper.
posted by garlic at 10:45 AM on February 26, 2014

The Billfold ran a great, plain-English guide recently:
posted by (Over) Thinking at 1:08 PM on February 26, 2014 [1 favorite]

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