What are the advantages to taking stock options early?

What are the advantages to taking stock options early for a company that is aiming for IPO within the next two years?





To my understanding, if options are taken early, the stock would completely be mines, regardless if I stayed at the company or not. Am I correct? I also know that you get taxed higher if you exercised options later when/if the value of the stock drastically increases. This part is where I am really unclear on.





I'm really new to thinking about my investments, so any advice would be appreciated! Thanks in advance!|||Victor,





Any time you exercise a call option and take ownership of the stock and hold it for at least 12 months, you will get the lower capital gains tax rate. If you sell it prior to owning it for 12 months, you will pay the higher short-term capital gains tax rate. Both are calculated by filing on Schedule D for the Form 1040.



However, if you buy the stock now with the intent of holding it until after the IPO, there are several things to consider: (1) you have to invest a lot of your money now and keep it invested until you sell, (2) the stock could go down losing you money, (3) the IPO could be delayed or not happen at all tying up your money even longer, (4)



You are correct in that buying it now means it’s yours unless your company has a clause requiring you to sell it back to the company if you leave early. Also, many times owners of stock prior to the stock going public (i.e., the IPO) are not allowed to sell it until after the IPO. Furthermore, many IPO’s have a cooling off period where owners are not allowed to sell for some period after the IPO (typically months after).



If you have call that does not expire until after the IPO, I really can’t think of any advantages to buying the stock early (except the long-term capital gains rate savings), but I can think of a lot additional risks you take by purchasing early. Furthermore, conventional wisdom says you should not make your investing decisions based on tax consequences although you should be aware of tax impacts.



If you keep the call (which I presume you received free as an employee) and immediately sell the stock after exercising it, your “Holding Period” Return On Investment will be MUCH higher with much less risk.



I recommend you investigate the rules of your option exercising rights (and the issues I mentioned above) before you make your decision.



Hope this helps,

Bryan|||A call option gives you the right to buy the stock at the strike price. If you wait till the stock appreciates in value such as after the IPO and then exercise the option then you can buy the stock and turn around to sell it at the market price, this has the advantage that you are waiting till you know that you can sell the stock at a higher price then when you bought it but it also means that you will only own the stock for less than a day thereby in the States you would pay the short term capital gains tax which is much higher then the long term capital gains tax for stocks that you've owned for more than a year. If you exercise the option a year before the stock rises in value then you will have owned the shares for a year thereby avoiding the short term taxes but you will be risking your money on the stock before you know whether or not you will make money on the deal.|||If the stock price is above the strike of your options, then your suggestion is the only answer I can think of. The stock options would increase dollar for dollar with the stock if held to expiration. If the stock goes down then you can lose more than the options. If you can get the stock early, cash out, and leave the company then you could have a profit that you might not otherwise get if you held the options.