This sponsored post is produced by SharesPost.
Stock options are a common form of compensation private companies use to incentivize their employees. If a company is successful and has a liquidity event such as an IPO, option holders can reap significant financial rewards by exercising their options at the price set on the date the options were granted and then selling the shares at a much higher price in connection with the liquidity event.
However, after-tax proceeds from a sale can be significantly impacted by the timing of the option exercise. Waiting until an IPO or other liquidity event to exercise their options can result in employees being taxed at ordinary income rates instead of long-term capital gains rates. The difference in tax treatment can roughly double the amount of tax paid. In many cases, the difference can amount to hundreds of thousands of dollars.
So why do option holders delay the exercise of their options? Perhaps the most common reason is the high up front cost to exercise. When option holders exercise their options, they need to cover the cost of the shares, and in many cases, income tax on the difference between the option’s exercise price and the current market value.
In addition, by paying the exercise price and related taxes with their own cash, option holders take on investment risk—if the value of the shares drops below the amount paid to exercise, the option holder loses money. In many cases, option holders feel their net worth is already over-concentrated in their employer’s stock and aren’t looking to double down by writing a significant check to exercise their options.
The good news is that, for option holders of certain companies, there is now a way to exercise their options with no out-of-pocket costs and no investment risk: The SharesPost Stock Option Loan Program.
Offered by SharesPost Securities, LLC, a licensed lender under the California Department of Corporations Finance Lender’s Law, the program enables option holders to exercise now and start the clock on favorable tax treatment without investment risk.
Option holders who would like more information can learn more at www.sharespost.com.