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Review this page carefully before submitting the exercise. Once you submit the exercise, you see a Confirmation page displaying the exercise details.

Employee Stock Option (ESO) Definition

You can print this confirmation for your records. Orders can be entered 24 hours per day and 7 days per week. Orders entered during non-market hours will be processed the next available market day. For exercise and hold orders, you must have the cash available to purchase the stock options in your account. Blackout dates are periods with restrictions on exercising stock options or rights.

Blackout dates often coincide with the company's fiscal year-end, dividend schedules, and calendar year-end. For more information on your plan's blackout dates if any , see the company's plan rules. Your plan may have a vesting period that affects the time you have to exercise your options or rights. A vesting period is time during the term of the grant that you have to wait until you are allowed to exercise it. For example, if the term of your grant is 10 years, and your vesting period is 2 years, you may begin exercising your vested options or rights as of the second anniversary date of the grant.

This essentially means you have an 8-year time frame the exercise period during which you can exercise your options or rights. For incentive stock options, a disqualifying disposition occurs when you sell shares prior to the specified waiting period, which has tax implications. For more information, contact your tax advisor. To ensure that all shares for your order are exercised at the same time and avoid a partially filled order, select All or None from the Condition field drop-down list.

Private companies do not offer same-day or sell-to-cover sales, and, not infrequently, restrict the exercise or sale of the shares acquired through exercise until the company is sold or goes public. Under rules for equity compensation plans to be effective in FAS R , companies must use an option-pricing model to calculate the present value of all option awards as of the date of grant and show this as an expense on their income statements. The expense recognized should be adjusted based on vesting experience so unvested shares do not count as a charge to compensation.

Restricted stock plans provide employees with the right to purchase shares at fair market value or a discount, or employees may receive shares at no cost. However, the shares employees acquire are not really theirs yet-they cannot take possession of them until specified restrictions lapse. Most commonly, the vesting restriction lapses if the employee continues to work for the company for a certain number of years, often three to five.

Time-based restrictions may lapse all at once or gradually. Any restrictions could be imposed, however. The company could, for instance, restrict the shares until certain corporate, departmental, or individual performance goals are achieved. With restricted stock units RSUs , employees do not actually receive shares until the restrictions lapse. In effect, RSUs are like phantom stock settled in shares instead of cash.

With restricted stock awards, companies can choose whether to pay dividends, provide voting rights, or give the employee other benefits of being a shareholder prior to vesting. Doing so with RSUs triggers punitive taxation to the employee under the tax rules for deferred compensation. When employees are awarded restricted stock, they have the right to make what is called a "Section 83 b " election. If they make the election, they are taxed at ordinary income tax rates on the "bargain element" of the award at the time of grant.

If the shares were simply granted to the employee, then the bargain element is their full value.

Incentive Stock Options

If some consideration is paid, then the tax is based on the difference between what is paid and the fair market value at the time of the grant. If full price is paid, there is no tax. Any future change in the value of the shares between the filing and the sale is then taxed as capital gain or loss, not ordinary income. An employee who does not make an 83 b election must pay ordinary income taxes on the difference between the amount paid for the shares and their fair market value when the restrictions lapse. Subsequent changes in value are capital gains or losses. Recipients of RSUs are not allowed to make Section 83 b elections.

The employer gets a tax deduction only for amounts on which employees must pay income taxes, regardless of whether a Section 83 b election is made. A Section 83 b election carries some risk. If the employee makes the election and pays tax, but the restrictions never lapse, the employee does not get the taxes paid refunded, nor does the employee get the shares.

Restricted stock accounting parallels option accounting in most respects. If the only restriction is time-based vesting, companies account for restricted stock by first determining the total compensation cost at the time the award is made. However, no option pricing model is used. If the employee buys the shares at fair value, no charge is recorded; if there is a discount, that counts as a cost.

The cost is then amortized over the period of vesting until the restrictions lapse. Because the accounting is based on the initial cost, companies with low share prices will find that a vesting requirement for the award means their accounting expense will be very low. If vesting is contingent on performance, then the company estimates when the performance goal is likely to be achieved and recognizes the expense over the expected vesting period.

If the performance condition is not based on stock price movements, the amount recognized is adjusted for awards that are not expected to vest or that never do vest; if it is based on stock price movements, it is not adjusted to reflect awards that aren't expected to or don't vest. Stock appreciation rights SARs and phantom stock are very similar concepts. Both essentially are bonus plans that grant not stock but rather the right to receive an award based on the value of the company's stock, hence the terms "appreciation rights" and "phantom.

Procedural issues

Phantom stock provides a cash or stock bonus based on the value of a stated number of shares, to be paid out at the end of a specified period of time. SARs may not have a specific settlement date; like options, the employees may have flexibility in when to choose to exercise the SAR. Phantom stock may offer dividend equivalent payments; SARs would not. When the payout is made, the value of the award is taxed as ordinary income to the employee and is deductible to the employer. Some phantom plans condition the receipt of the award on meeting certain objectives, such as sales, profits, or other targets.

These plans often refer to their phantom stock as "performance units. Careful plan structuring can avoid this problem. Because SARs and phantom plans are essentially cash bonuses, companies need to figure out how to pay for them. Even if awards are paid out in shares, employees will want to sell the shares, at least in sufficient amounts to pay their taxes.

Understanding Employer-Granted Stock Options

When and how you should exercise your stock options will depend on a number of factors. You would be better off buying on the market. But if the price is on the rise, you may want to wait on exercising your options. Once you exercise them, your money is sunk in those shares. So why not wait until the market price is where you would sell? That said, if all indicators point to a climbing stock price and you can afford to hold your shares for at least a year, you may want to exercise your options now.

Also, if your time period to exercise is about to expire, you may want to exercise your options to lock in your discounted price. You will usually need to pay taxes when you exercise or sell stock options. What you pay will depend on what kind of options you have and how long you wait between exercising and selling. With NQSOs, the federal government taxes them as regular income. The company granting you the stock will report your income on your W The amount of income reported will depend on the bargain element also called the compensation element.

When you decide to sell your shares, you will have to pay taxes based on how long you held them. If you exercise options and then sell the shares within one year of the exercise date, you will report the transaction as a short-term capital gain. This type of capital gain is subject to the regular federal income tax rates. If you sell your shares after one year of exercise, the sale falls under the category of long-term capital gains. The taxes on long-term capital gains are lower than the regular rates, which means you could save money on taxes by holding your shares for at least one year.

ISOs operate a bit differently. You do not pay taxes when you exercise ISOs, though the amount of the bargain element may trigger the alternative minimum tax AMT , which phases out income exemptions targeted for low- and middle-income taxpayers.

9. Understanding stock options from the employee perspective.

When you sell shares from ISO options, you will need to pay taxes on that sale. If you sell the shares as soon as you exercise them, the bargain element is treated as regular income.