Sometimes, it sucks to be right.
And, I really, really wish I was wrong on this one.
Because it was in a discussion with a colleague about the recent recapitalization of the company we work for, and the amount we will get based on the options or shares we have. He started talking about how while not an ideal situation, it should at least help him reach his goal of a deposit on his own house or apartment, something he has been looking to do recently.
Which piqued my curiosity.
Enter the black cat.
Because we started at the same time in the company, I know how much he got to begin with, so I asked him if he had bought significantly more, exercised the options early, or had been granted more as a bonus, as sometimes happens to people other than me.
Nope.
As it turns out, he and I have about the same amount, and it is a long way from being house deposit size for me. Which meant that he had made the wrong calculations, and it seems many people may have done similar. This guy is very smart, but he is also relatively young and also doesn't invest that much directly, so it is not in his wheelhouse.
These next numbers are not the numbers, but are there to illustrate what has happened when the new investors have bought, and the differences in some of the various conditions.
The company pays more per share than they are worth, and all shares and options are forced to sell to the new investor in a drag along sale.
Buy: 100
Worth: 80
Shareholder with 100 shares.
100 x 100 = 10,000 - capital gains tax.
Option holder with 100 options.
100 x 20 = 2,000 - income tax
That is quite the difference, isn't it?
But, options are called so because they have a fixed buy-in amount, so to convert them to shares, an option holder would pay the option amount, and then the tax on the difference to the actual value.
For instance, if when received the option amount was 10, and the value of a share was 20, to exercise them and convert to shares, it would cost 10 - tax. If the tax was 30%, it would mean that the cost of the share in total was 13, and the total cost of 100 shares would be 1,300.
Shareholder with 100 shares.
100 x 100 = [10,000-1,300] - capital gains tax of 30%
= 6090
But, if one was to exercise the options now in order to get the full share price paid, it goes on the current value of the share, which is the 100 evaluation being offered. However, even if the exercise was done before the announcement at the 80, it is a significant difference, because the cost to convert 1 share with a 10 option amount, would be 10 + tax on the 80, which at 30% would make the cost of conversion 34.
Shareholder with 100 shares.
100 x 100 = [10,000-3,400] - capital gains tax of 30%
= 4,620
That is over 50% tax, and that amount to convert would have to be paid upfront. Though, this is all moot, because some rule says that those shares would also need to be held for 12 months before being able to be sold, so this ship has sailed anyway. While there are going to be some people who have retirement money in their pocket from this sale, most people are going to be like me, getting a little bit of a bonus.
But, even though my friend at work said "better than nothing", the difference between his calculations and the reality is significant, and I could see his face sink and he die a little inside. It was pretty terrible, because I know how he feels as these kinds of things have happened to me in the past. And even with this recent sale, as I first heard the numbers my own head ran them before all the numbers had been said and I was thinking the same. But, less than 2 minutes later I realized it was not going to go that way.
He has been thinking about the larger amount for a week.
While those numbers are just to illustrate some of the differences and the reality of the real numbers has a much finer gap, there is a significant difference between the amounts that the people who hold options, and the people who converted their options into shares or bought shares very early will get. And, hopefully at the end of the day, I am the one who is very wrong and it is the larger amount, because I could really use the difference, and I think it would be awesome if some people were able to meet some of their financial goals with this opportunity.
There are people who love to be the bearer of bad news, but that is definitely not me.
Better not to talk about money, right?
Taraz
[ Gen1: Hive ]