Stock, restricted stock units, stock options, and other corporate securities may be included in your total remuneration package if you work for a private firm. Only when a liquidity event occurs for your organization will there likely be an easy method to turn that stock or option into cash?

That is, you still have options for maximizing the value of your stock-based pay. Whatever course of action you might take, verify that it complies with SEC regulations and your company's policy.

Preparing For Restricted Stock vesting—The 83(b) Election

You may be eligible to make an "83(b)" election within 30 days of the issuance of shares if the stock is subject to vesting restrictions meaning the store isn't yours to take with you when you leave the company until a certain amount of time has elapsed, or certain milestones have been completed.

When stock vests in the future, its value is often included in ordinary income. Yet, to get prospective tax benefits in the future, you can make an 83(b) election and voluntarily agree to be taxed on the value of the stock when you receive it, even if it is not yet vested. In other words, you're committing to pay taxes ahead of schedule.

If you make the election, are taxed on the grant amount when received, and hold the stock for the applicable holding period from the election date.

Stock Option Strategy

Nonqualified stock options (NQSOs) and qualified stock options (ISOs), often known as incentive stock options, are the two types of options available. The special or exercise price is the price at which the option entitles its holder to purchase shares of the company's stock.

The option holder acquires stock at the strike price upon execution. In most cases, the period during which an option can be exercised depends on its vesting schedule and expiration date. Neither stock nor stock options are taxable at the time they are given.

Share Purchase Agreements (NQSOs)

Nonqualified stock options are taxed in the same way as any other type of stock option. Let's pretend you've been given 10,000 NQSOs at a $1 per option strike price. When the possibilities are handed out, a share of stock costs $1.

If the NQSOs were exercised at a period when the stock price was $5/share, the employee would pay the firm $4 for each option exercised since the $4 difference between the strike price and the stock price is compensation income and subject under ordinary income tax and payroll taxes.

You can either pay the strike price plus taxes to the corporation to obtain the shares or surrender shares in exchange for the strike price and taxes, in which case you will receive a net number of shares.

Optional Stock Awards

Although more challenging to implement, incentive stock options (ISOs) can be more lucrative than nonqualified stock options (NQSOs). The mechanics of executing Nonqualified Stock Options (NQSOs) are the same as exercising ISOs, although ordinary income tax is not due immediately upon exercising ISOs.

The alternative minimum tax might apply to your $4 gain per share. Long-term capital gain tax rates are lower than regular income if you retain the shares for over a year after exercising a stock option.

Premature Option Exercise

Options may be exercised before vesting at some firms. Assuming your company's option agreement permits pre-vesting exercise, you may well be able to make an 83(b) election on your options, in which case you would pay the strike price to the company and, depending on whether the options are nonqualified or incentive, pay tax on the difference between the market value of the stock and the strike price. Register your 83(b) election within 30 days of an early option exercise.

Stock Option Exercising Considerations

When considering whether and to what extent to exercise your options, keep the following in mind, even if the strike price on your choices or the stock price at the time of a scheduled exercise is low:

Cost:

Can you afford the strike and any associated tax payments now, or will you have to wait until the private firm sells or becomes public, which might be years from now? The associated fees might be relatively high depending on the number of options exercised and the spread between the strike price and the stock price.

Diversification:

Do you feel secure making another investment in a privately held business? You're getting paid by the corporation already; is it wise to put any of your cash on the line?