I’ve been getting some for years at work, and have just ignored them. So am I right in assuming this is how they work?

I’m award “stock options” which follow the company share price. I can’t “spend” them, they exist to tempt me to stay in the company until the next stage which is… at various points in time say 1 year, 2 years and so on part of the award “vests” i.e. becomes proper company shares which I can sell and get cash in the bank.

So, can I sell them, should I sell them and is it just a question of awaiting / gambling on max share price until I do? Will I get taxed on them – US company working in the UK – I’m guessing yes?

We get stock options where I work and there are two way that they work.

The first is you can invest a certain % of your salary pre tax each month and then buy them at a discounted rate. If you do this and you wait 2 years they become vested. This means you don’t have to pay tax on the initial money you used to buy the shares (as this was a pre tax investment) if you sell before 2 years you pay the tax you would have paid on the income.
The second way is that the company offers you stock at a set price (or free) but you can’t purchase or sell for say 5 years. This ties you to the company with golden handcuffs. These often also have an expiry date so they mature in 3 years but the option must be exercised within 5. If the deal looks good you can use the value of the option to buy the stock. So sell a certain % to raise the money to purchase the rest leaving you with stock but no cash. The advisors that the company uses should be able to explain the best way to do this.

As there is a tax treaty between the USA and the UK you will only need to pay tax in the UK if you declare the sale here.
One thing worth noting is any options not exercised if you quit or are sacked often disappear so it is worth keeping on top of it.

Yes, its the second one, I got some free during an acquisition, and I get some instead of / alongside any pay rises. Its appears a portion of them vest after each year, with the entirety available over 5 years.

I’ve never done anything with them so I guess they’ve been dribbling away, FFS.

So are these:

DRIP – Common Stock £xxx = the amount of stock options I have, which I can’t sell?

Vested Common Stock £xxx = the amount of DRIP re-invested into company shares which I hold and can sell?

Is that right?

If the company ever goes pop you’ve lost both your job and the shares – so once they ‘mature’, sell them.

I’ve done this before plus when the various Building Societies de-mutualised.

I think I’m going to, but which one of the above can I take out? It appears I’m paying some kind of tax on it when a “dividend” is paid and reinvested (no idea what this means).

If you don;t understand them, I suggest you speak to the rewards people in the HR team to get their input. There are different tax treatments for different types of shares.

I’m in three schemes at work:

1. Save as you earn (SAYE). I pay a fixed amount of cash (net of income tax/NICs) into a scheme for 3 or 5 years (I’m a pessimist, so I got for 3 year terms). From the outset there is an agreed strike price – it’s usually a 20% discount to the then mid market price of the shares. When the scheme matures, I have a set period to exercise the option – i.e. turn my saved cash into shares. Assuming the share price has gone up in the preceding 3 years, I should make money. Once I hold the shares, the only tax I need to concern myself about is (1) income tax on dividends and (2) capital gains tax if I sell the shares. Scheme is available to every employee and is a pretty surefire thing to do.

2. Sharematch. I buy a share gross of tax/NICs), the company gives me a share. I can put a max of £1800 a year into this. Shares are bought at an open market price. I need to hold the shares for either 3 or 5 years (agreed at the outset) or any sale of them before that time has elapsed will result in an income tax charge (remember, they were bought from gross income. Also available to every employee. Still early days, so not sure how beneficial.

3. Discretionary plan. I am granted free options over a fixed number of shares. These will vest only in certain circumstances and are dependent on the performance of the company (criteria agreed between the board and the remuneration committee). They vest one tax year apart on a 60/40 split. Because they cost me nothing, I’ll have to pay income tax on whatever I get (between zero and 3x gross salary). This scheme is opened each year and is awarded by the executive committee of the board only to certain employee. This is the bug ticket and also the true golden handcuffs.

Frankly, if the business was bought I’d be happy if all were bought out at full price….

Mine appears none of those, but I will ask.

It seems to be that “we give you £x which you can’t access now although if you wait – and stay employed – for 5 years, will be worth £y. It appears I’ve been through 3 of those, so have a nice amount of £y that, if I i understand it correctly I can cash in now but probably will have to pay tax on.

Frankly, if the business was bought I’d be happy if all were bought out at full price….

Yep.

I was putting in £250pcm on a 5 year (with a 2 year extension option)SAYE at £2.75. Company went private at £14.00. 🙂

Stock options are the right to buy shares at an agreed price. For example, in 2010 your company gives you the right (option) to buy shares at £1/share. If, in 2015, the company’s shares are worth £2/share, so you can buy the shares (exercise the option) and then sell them on, and make a tidy £1 / share. Or you can just exercise them and hang on to them, and become a shareholder of the company.

Option schemes typically have a vesting period, which means you can’t buy the shares immediately, only after a number of years have elapsed. They may also have an expiry date, after which you lose them completely if you haven’t exercised.

If you’re getting dividend payments, then you’ve got at least some real shares, not just options. Real shares don’t expire, and you can sell them whenever you want. You will also receive your share of any dividends paid by the company, although I think that “DRIP” means that any dividends are being used to buy more shares, rather than being sent to you in hard cash.

The fact that you are ending up with shares without explicitly buying them seems a little odd, as stock options aren’t supposed to have any obligation to buy them.

Income tax on divi
Capital gains on sale of shares

The options will/should have a strike price, ie the price that they can be converted into the shares.

If this is £1 and shares trade at £2 great
If this is £2 and the shares trade at £1 opps

I believe you are correct to assume vested shares are yours, or fully vested would imply they are yours regardless of employment with the firm.

Drip shrares are those reinvested so you get additional shares in lieu of the usual cash dividends. Normally you need to opt into this, but it’s possible that this was set as default by the company scheme.

You should have a statement showing exactly the number of each class of shares you own, it’s not overly clear from what you’ve said.

Definitely speak to someone at the company to go through this all. As someone above said, you can end up seriously reliant on an employer if they are paying your wages, sorting out your pension and running a company share scheme with significant value.

like you suggest, if the share incentives are a good deal then keep taking them, but consider spreading things out once the shares are freely yours.

As above. I buy mine (up to £200 a month) at a price agreed when I start the scheme, I can sell any shares I own after 5 years at whatever price they’re currently at. In the meantime I get dividends based on my current holding.

Drip shrares are those reinvested so you get additional shares in lieu of the usual cash dividends. Normally you need to opt into this, but it’s possible that this was set as default by the company scheme.

Thanks Vern0n. The pennies have dropped. I am looking at a statement, and my post tax divedend value is the same as the Drip investment increase this year. My new “award” is Restricted Stock Units.

So I beleve the vested stock and drip stock is what I own, and can sell. The RSU will vest over 5 years and is the incentive to stick around. I’m going to give the holding company a call and see if those shares remain if I cease my employment or can exists as a end of mortgage nest egg….

Kryton, you need to read the terms and conditions, schemes can vary and you have multiple awards under different schemes.

From what I have read my GUESS is that the 5 yr restricted options still have two years to run (you have had them 3 years). As such they are worth nothing until you have been with the company 5 years. You can’t sell them early.

As you say already vested stock/options you can sell. Note if you have vested options which you haven’t executed yet and you leave the company they will expire worthless.

Your HR department should be able to help you out with all of this.

All these amounts are taxable, most probably as income, you will most likely have tax and national insurance taken off when you execute the options/sell the shares.

You will have to pay Capital Gains Tax on the amount between which you paid for your shares and extra value they attain when you sell them, but not NI. CGT is based upon your income tax levels. You might have the Shares under one of the possible tax minimisation schemes but these are mainly for start ups so it’s probably unlikely. You have a yearly tax free allowance of around £11k which you should probably take out if you can every year.