Knowing when is the best time to exercise your options isn't easy. Here are some of the considerations you may like to work through to get yourself thinking about the risks and rewards of different strategies.
When to exercise - the tax implications
Exercising your options at different stages of the company's development may impact the tax you are required to pay on your options. Exercising early in a company with an upward trending share price may result in you paying significantly less tax.
What if you exercised your options and then the company's share price did this?
Before exercising your options make yourself aware of your tax liabilities by consulting with an accountant or tax advisor.
Investing has risks
Investing is a risk so here are some things to consider:
- How much is the exercise price?
- What are the tax implications of exercising (these vary by country)?
- What if I can't recover the money I spend on the exercise price and tax? What impact will this have on my financial stability and my future prospects?
- Am I likely to need the money invested in the short-medium term? What if I can't access it (as there is no way to sell the shares)?
- What is the risk that I will lose all of my money?
- Could I be invested in something better? Is there an opportunity cost associated with being tied up in this investment?
- What percentage of my total investment portfolio will be made up by this holding? Am I happy with this weighting?
- What are the potential risks and benefits of exercising early versus exercising later? See graphs above.
- What are the potential 'unknowable' risks I can consider? Improbable and seemingly impossible things happen all the time.
- Have I given consideration to my own 'familiarity bias'?
Familiarity bias: The tendency to make investment decisions based on being familiar with the investment. Other more viable investment options may be overlooked in favour of what you think you know.
New Zealand Tax Law
See Inland Revenue's website for more information on employee share schemes (ESS) and taxation: