"you are treating an opportunity lost -- an opportunity cost -- as a loss"
No, I am not treating this as an opportunity cost, because
the subject is stock options and their relationship with
stock buybacks. It is you guys who brought the regular
option gambling to the table, and now talking about
"ABC opportunities", buy-write calls, caps, etc.
The company option plans are nothing like the above.
It doesn't look like Elmo ever had or exercised
any company options, so let me explain this to him,
especially when you brought up the IRS rules.
Again, you receive an option grant for, say, 100 shares
@ $20 exercise price, with vesting period of, say, 3
years (as you might know, the vesting is usually
spanned over few years, say 25% of shares per year).
When the time comes and the options are "in the money",
you decided to exercise the option, typically using
"same-day sale", or "cacheless exercise". Which means
that you notify your company of the intent to exercise,
and you notify your designated broker of your intent to
sell.
The broker will contact your company, and the
company will effectively SELL your 100 shares to
the broker AT CURRENT MARKET VALUE, say $30. I say
"effectively" because no money was transferred yet,
but for IRS this transaction is recorded at a cost basis
equal to CURRENT MARKET VALUE. The broker will then
sell this chunk of shares, maybe in fractions, the very same
day, and likely at slightly different fluctuating prices.
However, due to additional agreement between the broker
and the company with regard to options, the broker
transfers only 100*20 = $2000 (precisely) back to your
company, and the difference (minus broker's fees) is
yours. Note again, that the whole transaction goes at
FMV and you need to sign a margin account agreement with
your broker for the full amount of the transaction, and
even pay some (relatively small) margins fee for this
short-lived event, you need to borrow the money for the
WHOLE transaction.
Since the sell price is usually not much different
from the original base price, the broker's transaction
is almost tax-free for you, or maybe even at small loss.
However, your company will record the difference as your
compensation in the W-2 form, that's where you enjoy to
pay your full taxes. That's it.
Now, as we observe from the above procedures, the company
sells NORMAL shares to the broker, as it is all initiated
at FMV as per IRS records. But the company takes a loss
due to options agreement with you.
Also, the company attributes this difference directly
to your salary, which is another plain indication that it is
a labor expense. As we see, the company shares are
just regular shares, no caps, no craps, and no "buy-writes"
happen at the time of option grant.
I hope this clears the issue.
Cheers,
- Ali |
