Stock Option Mania: The Dark Side

Watch Out. Your Dreams May Come True... As you've read in the news, landlords and tenants occasionally use warrants to sweeten a lease transaction. (See the PikeNet Interview with Chris Donovan, May 17 Dispatch). And of course, a number of real estate players have jumped to dot-com land with offers of huge stock options. But here's a cautionary tale. Some types of stock options can come back to bite you. (Caveat: I'm not a lawyer and I'm not providing legal advice.) Below is an example of options gone awry. It's from Valley Talk, Fortune Magazine's e-newsletter, dated May 25, 2000.

"Here's what happened to someone who works at TheStreet.com (TSCM), 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 the 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 Street.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." ... As the article goes on to say, a company could re-price its options. But that has some very nasty financial consequences. Oh my.

--Peter