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Strategies & Market Trends : Keep Your Eye On The Ball - Watch List -- Ignore unavailable to you. Want to Upgrade?

To: Susan Saline who wrote (1735)	5/27/2000 9:31:00 AM
From: TFF	Respond to of 2802

Stock-Option Nightmare May 25, 2000 Fortune Stock options used to be good things. Maybe even great things. Options were the reason otherwise-sane people left cushy jobs at good companies to go work in cubicles the size of broom closets for companies run by 29-year-olds. It's the reason people endured long hours, sleeping on the floor of their broom closet, missing little Suzi's first dance recital. The whole thing was worth it because if you collected enough stock options from your Internet employer, you'd be rich. Rich enough to retire if you felt like it. Rich enough to buy three vacation homes and still have enough money for fast cars. This, at least, was what stock options meant until two months ago. Now the picture's a little darker. In some cases, stock options are not only worthless, but can wind up costing you money. That's right. Own stock options and you can go sailing into debt. It's the new-economy dream gone horribly awry. What's happened is that some dot-com option-holders have had to pay more money in taxes to the IRS than they could hope to make selling shares of their deflated stock in the public markets. This is the ugly fine print of the options culture. It's horribly arcane and it depends on what kind of stock options you have, but few people who signed up for an exciting job at a startup worried about such things. "I imagine that most people don't even know what kind of stock options they have," says David Readerman, an Internet analyst at Thomas Weisel Partners who recently wrote a report about the receding glamour of stock options. The situation has turned ugly because an alarming number of Internet companies are trading below their IPO price. Thus, many employees' options are "under water," meaning the price at which they can buy the stock is higher than what the stock is currently trading at. Readerman tracks 375 Internet stocks. Of these, almost half have sunken below their IPO price. Here's what happened to someone who works at TheStreet.com, a stock that's currently trading 68% below its IPO price. When he signed up to work at the online financial magazine, he got 9,000 options. He and all of his co-workers were thrilled when TheStreet.com's stock zoomed up to $60 on the first day of trading last May. He exercised his options, buying the stock at the nice low price of $0.15, but he couldn't sell any shares yet because of the standard six-month lock-up employees and insiders are subjected to. When the lock-up came off in November, the stock was trading at $14. He didn't sell then because he figured the stock would go back up. And why wouldn't it--Internet stock euphoria was in full bloom. But TheStreet.com's stock didn't go back up. It went down. All the way to $6. Here's the really bad part. Our friend had to pay $40,000 in taxes. Why? Because when you exercise a non-qualified stock option (which is what a lot of non-management employees get), you have to pay the regular income-tax rate (34% in his case) on the difference between the price you bought the shares at and the price the stock was valued at that day. In our TheStreet.com friend's case, this taxable, yet entirely phantom, gain was $120,000. So if he were to sell his stock now, minus the shares he had to unload to cover the taxes, he'd make a total of $36,000. Less than what he coughed up in taxes and not exactly retirement riches. Is there any hope for hapless dot-com'ers trying to hold onto their Net dreams? Not really. TheStreet.com could re-price its options so that everyone could buy the stock at $6 and pray it goes up from there, but there are two problems with this. One is that a recent ruling from FASB, the accounting police, dictates that companies now have to report options re-pricings as a compensation expense on their income statements, which would eat into the bottom line so many Internet companies are desperately trying to turn into a positive number. "There are horrendous accounting implications for re-pricing options," says Jon Ocker, a compensation expert at the San Francisco law firm of Orrick, Herrington & Sutcliffe. The other problem with re-pricing options is that large shareholders loathe the idea. To their way of thinking, why should employees get their options re-priced when other shareholders don't suddenly get to have the rules changed? Many institutions have policies to vote categorically against options re-pricings. This may be good news only to old-economy companies whose employee ranks may now be less ravaged by options-wielding Internet companies. "When the market's going up, everyone thinks that they'll get options and be the next dot-com millionaire," warns Readerman. "But I think there are going to be more stories like this."