Stock Options: Net Worth or Not?
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Today I received a stock option grant for the company I am working for. Traditionally, the stock options for this company have done VERY well and I am hoping that mine will do the same. We shall see.
These options vest on a 1/3, 1/3, 1/3 schedule. I will be fully vested after 3 years. There is a 10 year expiration on them and I can receive a cash payment for them at anytime after they vest – I don’t need to go to the market to exercise.
The question that I am pondering is whether I include these options as part of my net worth. I think I should. Once they vest, they are essentially a part of my stock portfolio. They will move up and down in value as the company’s share price moves. At any given time (once they vest of course), I can sell them and realize the gain. The only real difference between these “shares” and my other share holdings is that if these are below a certain price, then I have not made anything and I have not lost anything. It is my money and I plan to parlay the earnings into other investments. Let me know what you all think….
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6 Comments on this post
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Derek said:
Hi, Dividendguy, the conservative view of valuing assets is that you value them at “net realizable value.” So if you cannot yet realize them, the conservative value at which to include them would be zero. Include them as a “note to your accounts” rather than as a monetary figure.
January 20th, 2006 at 8:39 pm -
Dave said:
I agree with Derek, but also keep in mind that the fact that stock options for your company did well in the past is nothing to go on. It’s just as probable that your options become worthless, who knows, which is yet anothe reason to take a conservative approach.
January 20th, 2006 at 9:33 pm -
Neo said:
I have stock options which have been granted to me over the years and are now fully vested. But since I haven’t acted on them, I do not include them as part of my net worth.
But you have reminded me to look into them once again.
Neo
January 21st, 2006 at 9:11 am -
Vince Chan said:
Vested stock options should definitely be counted in your net worth. During the bubble many top execs and CEOs relied on their vested stock options to apply and obtain bank loans; leveraging themselves to obtain their luxuries. Much of their net worth were trapped in those options. So it is a viable asset once vested.
Having said that. I have a personal distaste for such company compensation programs that are basically saying, “hey, gamble with us! If your options are underwater after 10 years, guess how much time you’ve wasted?”
I’d rather go for traditional bonus compensations. If a company woud like to encourage employee stock ownership, be like Microsoft and give those stock outright to the employees! As least there’s a value there not dependent on a strike price that may or may not work in your favour.
But then again, .ou can’t pick what compensation package your company endorses
January 25th, 2006 at 11:28 pm -
Dan said:
Actually, you could go about this two ways. First of all, I wouldn’t count them on your portfolio in any way until they have vested. Once they are vested, you could count them as there realizable value (as stated by another poster). The problem with that logic is that you are not putting a value on the 10 years you have left. In other words, if they are worth 10k today, with 10 years to go, it would seem silly to sell them (or value them) at 10k.
So your other option is to try to calculate a value for these options. This is easy if they are near term, because you can just find comparable ones trading on the market. For employee options that expire in 10 years, you won’t find anything comparable, so the easiest thing to do is to compute a Black-Schoels value. To do this, just find a BS calculator online. However, you will need to calculate one of the inputs – volitility. Probably the easiest way figure what the market thinks the volatility is, is to take some options prices from the market, and back out the volitility number using the real price. Then you can plug that assumed volitility into the calculator.Having said all of this, it is all theoretical. For a conservative net worth calculation(and the way I calculate mine) is just to use a present realizable value of vested shares.
February 4th, 2006 at 11:43 pm -
Jose said:
Once you are VESTED, the difference between the strike price and the stock price at any current moment is part of your networth.
Otherwise it isnt.
February 10th, 2006 at 10:28 am
