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Lesson 11. Options and the IPO > The 30-Second Recap - Pg. 54

Options and the IPO 54 This is doubly true when exercising deep discount options after an IPO. As mentioned earlier, your company may grant you options long before the IPO. If it does it far enough in advance, the discount might be steep. It is not unheard of for companies to grant early options for less than $1 per share. For example, you have options on 1,000 shares of stock with an exercise price of 25¢ per share. The company makes its IPO and after the lockup period, you are free to exercise your options. The fair market value of the stock is $35 per share. Your spread is $34.75 per share. If you exercise all 1,000 shares, you will owe withholding tax on $34,750. Since the tax could easily be 20 percent, your tax bill is almost $7,000. On top of that, you may trigger an alternative minimum tax. Some companies arrange to help employees handle big tax bills like this. They may offer loans with the stock as collateral or other helps, but you must pay the withholding tax. Tip Be very careful in your tax planning to make the most of your windfall. If you do a cashless transaction, you will have the cash even though it will take a big chunk out of your profits. It may make more sense to use some of the planning strategies noted in Lessons 9 and 10, such as delaying the exercise or exercising in increments. Your employer may make some tax planning help available to you. Professional help will cost some money, but may save you more than it costs over time. It is always wise to consult a tax expert when dealing with large sums of money and potential tax problems. The 30-Second Recap · IPOs offer the opportunity for employees of private companies to value their options based on the stock price of a publicly traded stock. · Securities laws may inhibit your ability to exercise your options. · Underwriters require a lockup period to prevent employees from exercising their options and selling the stock just following an IPO. · Taxes can be a severe problem for employees exercising deeply discounted stock options in a rising market.