Marc, if you buy the stock for, say $15, and sell it a couple of years later at $70, you've got a nice profit with a capital gain preferential tax rate. If you received options from the company when the price was low, you may want to exchange those options for actual shares once the stock has appreciated, since your cost basis remains low. By doing that, you increase the value of your stock holdings, allowing you to borrow on them, if needed. There are all kinds of tactics a company employee with stock options might want to use, depending on his or her personal situation. In the end, it all boils down to getting part of your salary at a discount and realizing net gains taxable at a preferential rate, about half the rate of the maximum for ordinary income. Note also that if an employee wants to contribute from earnings to a Roth IRA, but still needs some cash for living expenses, the employee will be in the habit of periodically exercising options, selling stock, taking long term profits, generating cash flow, and then being able to afford to put more earned income into the IRA.
If these stock option programs look too generous for the employees, just remember that they also provide a great incentive for the employees to work better, so that the stock goes up, making the options worth even more, and making outside shareholders like most of us much happier.
Art |
