More Tech Firms Looking To Ditch Stock Options
from the follow-the-leader... dept
Following Microsoft’s recent lead, it sounds like many other tech firms are planning to ditch stock options, if new rules require expensing options. This seems silly. Expensing options doesn’t actually change anything from a money perspective – just from an accounting perspective, and any reasonable analyst will understand the difference. However, options often are good tools to compensate employees, and taking that away can cause problems for startups trying to attract top talent.
Comments on “More Tech Firms Looking To Ditch Stock Options”
Why bother
To begin with, there aren’t very many start ups any more and they’ll all move to India anyway, so it doesn’t much matter.
Stock options still work for private companies
Startups can still use stock options conveniently. After all, the FMV is usually pennies per share and rarely changes, so the impact is trivial. In fact this gives private startups an advantage over their public rivals.
And, Gerbil of Death, the rate of startup formation seems to be picking up. Anecdotally, valuations are even starting to pick up.
No Subject Given
Why would you not prefer to get restricted stock over a stock option? If options are “motivating factors” then the restricted stock should be the same, without the downside to the employee (underwater options). The impact on other shareholders is the same, the company issues new stock to cover all stock/option grants.
Re: No Subject Given
Your point about employee motivation is basically correct, and one often missed by those commenting on the issue. However, the financial results are different for employees under the two systems.
Regarding the question above about why an employee might not prefer stock? TAXES. If the stock is granted to you, you recognize taxable income in the amount of the fair market value, whatever that may be. Even a modest grant of, say, 20,000 shares at $0.10 per share equates to $2000 FMV and roughly $1000 in out-of-pocket, cash, tax liability (YMMV). A similar option grant creates no such liability, and the issue of taxation on unrealized gain during the option period is almost always covered via a 63(b) election to defer taxes until the gain is realized.
As for the lack of the downside you suggest, the reverse is in fact true. If the options expire worthless and you have not exercised, you experience no out-of-pocket loss; it’s like being given a [tax-free] lottery ticket that didn’t win. On the other hand, if that restricted stock granted in the first paragraph goes down the tubes, you experience a capital loss (long- or short-term depending on your holding period). You would normally get a deduction for that (but only up to $3000 annually against ordinary income, remember), and maybe get that same $1000 taxes back that you paid earlier. Congratulations, you just loaned the state and federal governments free money!
For these reasons, options are generally more favorable to employees than restricted stock. The most rational argument from employers against stock option expensing (since the numbers are already disclosed) is that the methods for valuing option grants are widely believed to be inadequate and cumbersome when dealing with option expirations and cancellations. Everything else is just a red herring focusing on stupid or lazy analysts and investors.
The Options Scam
Gullible techies believe they are making more money, when in fact it is an excuse for companies to pay them lower salaries, executives can cash out the stock when it peaks and leave techies broke. Or worse than broke — there are the tales of dot-com techies who bought homes based on options collateral, then the company went broke, they defaulted on the mortgage, so they are triple-punished by the tax system and end up owing a million dollars in tax fines. They’ll spend the rest of their lives being treated like criminals by the system.
Re: The Options Scam
You know, dorpus, sometimes you write stuff that’s almost interesting.
On this one, you’re unfortunately wrong.
Executives operate under even stricter rules than rank-and-file employees as regards selling shares because of insider trading liability. They are more likely to be bound to six-month holding periods following an IPO.
Anyone who borrowed money based on paper wealth was taking a risk. Woe to the fool and his money…. Ditto for the greedy ones who avoided all rational advice and paid taxes while holding on to the stock rather than selling. They made bets that just happened to work against them. Would you defend those people if they cashed out and lost their money in another company’s stock? Poor financial decision making getting cheated.
I would have expected more from you, at least an analysis of the potential benefits to companies of using restricted stock, which increases tax burdens on employees and either ties them to the company to vest enough stock to break even on the taxes or, even worse, makes them cash poor because of the increased tax burden and therefore more economically dependent on their jobs. How about that to get you started?
Re: Re: The Options Scam
>Executives operate under even stricter rules than rank-and-file employees as regards selling shares because of insider trading liability. They are more likely to be bound to six-month holding periods following an IPO.
That’s the standard belief of employees who think they are getting a fair deal. In reality, executives have a variety of options — when the deadline passes, executives can give their propaganda pep talk so that employees hold on to their stocks while they cash out. Employees will find out only after the fact. Executives can have their friends (outsiders) cash out earlier, to split the take. Regardless of what laws say, how much enforcement takes place?
>Anyone who borrowed money based on paper wealth was taking a risk. Woe to the fool and his money…. Ditto for the greedy ones who avoided all rational advice and paid taxes while holding on to the stock rather than selling. They made bets that just happened to work against them. Would you defend those people if they cashed out and lost their money in another company’s stock? Poor financial decision making getting cheated.
You’re asking me to defend two bad choices. The third choice is to not get stock options anywhere.
>I would have expected more from you, at least an analysis of the potential benefits to companies of using restricted stock, which increases tax burdens on employees and either ties them to the company to vest enough stock to break even on the taxes or, even worse, makes them cash poor because of the increased tax burden and therefore more economically dependent on their jobs. How about that to get you started?
It benefits the company, instead of the employees.