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Lesson 15. More Strategies and Tips > Independent Contractors and Others - Pg. 74

More Strategies and Tips 74 · Employees who want to take the cash and run should choose a cashless exercise early, which will also minimize income tax. The risk here is that you will pass up potential gains by getting out of the stock early. · Holding your options for as long as possible produces the largest potential gain with the least risk, but it is not risk-free. You could hold the options 10 years and they still may be out of the money. You may have passed the time when you could have cashed out. This is not a comprehensive list, but it does illustrate that you need to think your decisions through in a rational manner and don't let yourself jump to a decision just because the market is volatile or you think you can outguess the market. Independent Contractors and Others Think stock options are just for employees? Actually, a company can grant nonqualified stock op- tions to nonemployees as well. This practice is especially prevalent in the high-flying world of Internet startups and initial public offerings. It is common for landlords to want a piece of the action in Silicon Valley along with lawyers, consultants, and other contractors. Companies seem willing to part with options to get the right location or a high-powered attorney. For many young companies, cash is an important commodity and it makes more sense to pay with options whenever possible. Should you take options instead of cash for your services? You need to decide whether the company has a future and whether you can survive without cash in the meantime. You face the same risks as everyone else holding options with the exception that employees are probably drawing a paycheck too. A number of contractors (someone who works for a company, but is not an employee) have made substantial fortunes working for equity rather than cash. Those are the ones we hear about, but undoubtedly there are many contractors who went down with the company when it failed and the options became worthless. Caution You may be taking a bigger risk than is acceptable by choosing options over cash for all of your compensation. Most companies willing to pay in options are young and vulnerable to a variety of dangers that can render their stock worthless. If you really believe the company has potential, ask for part of your compensation in options. I would be concerned about accepting options to cover things like inventory, parts, and out-of-pocket ex- penses. Noncompete Provisions Don't be surprised if your current options' grant or future ones contain a clause that may make it financially painful to leave your current employer for a competitor. Noncompete clauses are common in many industries, but in recent years, more employers are writing them into options' grants. You might expect to lose unvested options if you leave. New pro- visions call for the loss of even vested options and the possible forfeiture of any profits from options or stock within six months of the employee's departure. Although the recent court rulings seem to favor the employer in these cases, the law is far from clear. Nevertheless, read your options' grant very closely for any noncompete clauses, sometimes identified as call-back or claw-back provisions. Be aware also that the noncompete provision may be a separate document that you signed at the time of employment. This document may specifically identify options, but it also may speak in general terms. In either case, you may have to go to court to resolve any differences.