How could I figure out whether it’s best to exercise and hold or just exercise non-qualified stock options?

February 21, 2000

Date:   Wed, 12 Jan 2000
From:   Paul

A NQSO question:

Is there a methodology to figuring out whether it’s best to exercise and hold or just exercise? In the former enough shares would be sold to pay the taxes and option costs…. So while Qualcomm has gone up a lot, I can’t see that there’s any advantage to the exercise and hold strategy unless the stock price goes up a lot. What’s the best way to discover the cross-over point where capital gains on fewer shares is better than standard withholding on a straight exercise?

Thank you.

One other question that may be in the tail wagging the dog category. Suppose I leave Qualcomm to go to vet school in Washington state which has no state income tax. After establishing residency there I exercise my last set of options which I’m allowed to do up to thirty days after leaving the company. Would California have any claim on the payout?

Best Regards,



Date:   19 Jan 2000

Hello Paul,

I don’t have a “magic formula” for you.

What it boils down to is, when you have non-qualified stock options, you are taxed when you exercise your options. Consequently, most people sell the shares when they exercise them. An exception is when the options are exercised when the stock has a low value before an IPO.

When non-qualified options are received relating to employment in California, the income as a result of exercising the options is California-source income, subject to tax in California.

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, “Executive Tax and Financial Planning For Non-Qualified Stock Options”.

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