An employee stock option gives you the right to purchase a specific number of shares of your company’s stock at a specific price — the grant or strikeprice — within a specific time period. The grant price is typically the market value of the stock at the time your company granted you the options. For tax purposes, employee stock options are classified as either Incentive Stock Options (ISOs) or Non-qualified Stock Options (NQSOs). The primary difference between the two lies in their tax treatment.
As the service provider for your company stock option plan, Morgan Stanley keeps track of your stock option grants and provides you with online access to your stock options — and help when you need it.
Incentive Stock Options Questions
- WHAT DOES IT MEAN WHEN AN OPTION VESTS?
When an option vests, it usually becomes available to exercise, meaning you may buy stock at the grant price for the option. You are not required, however, to exercise your options as soon as they vest. If you believe the stock’s price will rise further, you can wait until a more advantageous time to exercise. Your stock options vest on a schedule determined by your company. Be sure to check the vesting schedule in your grant agreement or on www.stockplanconnect.com for additional information.
- WHAT EXERCISE METHODS ARE AVAILABLE?
Morgan Stanley offers several ways to exercise your stock options:
Same-Day Sale/Exercise & Sell All
The goal of this type of exercise is to acquire cash, rather than shares of stock. You are not required to make an upfront payment for exercising your options. Rather, option costs, applicable taxes and fees are paid with the proceeds of the sale. You receive the net proceeds in cash. This exercise can be placed either as a market or limit order.
Sell to Cover
The goal of this exercise is to acquire stock without paying for the shares out of pocket. With a sell to cover exercise, you sell only enough shares to cover the option costs, fees and applicable taxes. You receive the remaining balance in shares of stock. This exercise can only be placed as a market order.
Exercise and Hold
With an exercise and hold, you use your personal funds to cover the option cost, fees and applicable taxes. If you exercise 100 options, for example, you would pay for and receive 100 shares of your company stock.
- WHAT IS A MARKET ORDER?
A Market Order is an order to sell the shares acquired from your stock option exercise at the current market price. Morgan Stanley will place the order immediately upon receiving your request to exercise.
- WHAT IS A LIMIT ORDER?
A Limit Order is an order to sell shares at a specified price. When the stock price reaches the limit established, your order is submitted for execution. This type of order remains in effect one year from entry date unless you cancel prior to that. A limit order expires at the end of one year or on the grant expiration day, if expiration occurs earlier.
- HOW DO I EXERCISE AN OPTION?
You may exercise your options on StockPlan Connect, the Morgan†Stanley website for stock plan participants. StockPlan Connect allows you to track and exercise your stock options, and select between proceeds distribution methods. Note that if you do not exercise your stock options before the expiration date, they will expire with no value. Please refer to your company’s specific plan details.
- HOW AND WHEN CAN I RECEIVE MY SALES PROCEEDS?
You can exercise your stock options online using the StockPlan Connect website. Morgan Stanley offers several choices for proceeds delivery.
Deposit into a Morgan Stanley account
If you are a current Morgan Stanley brokerage client, we will deposit cash or shares directly into your brokerage account on the settlement date. If you do not currently have a brokerage account with Morgan Stanley, we will open a limited purpose account for you. Your proceeds will be available to you three business days after the trade date (to account for a three-day “settlement” period that applies to all stock market transactions).
Check via regular mail
If you choose this method, Morgan Stanley will mail your sales proceeds. You should receive your proceeds within 8-10 business days from the trade date.
Check via overnight delivery
Morgan Stanley can send your proceeds via overnight delivery, for a fee. You will receive the proceeds of your sale in the form of a check four days after your trade date (to account for a three-day “settlement” period that applies to all stock market transactions).
U.S. Dollar wire
For a fee, Morgan Stanley can wire your proceeds to your bank on the settlement date. Wire transfers are in U.S. dollars.
Foreign currency wire
Morgan Stanley can wire your proceeds to your bank in your local currency for a fee. You should receive the proceeds 4-5 business days after the trade date.
Foreign currency check
For a fee, Morgan Stanley can send you a check in your local currency. You will receive the proceeds 10-15 business days after the trade date.
- WHAT ARE THE TAX CONSEQUENCES OF EXERCISING AN INCENTIVE STOCK OPTION?
Incentive Stock Options are qualified under IRS Code Sec. 422 to receive special tax treatment. Generally, no income tax is due at grant or exercise. Rather, the tax on the difference between the grant price and the Fair Market Value (FMV) of the stock on the exercise date is deferred until you sell the stock. At that point, your tax rate varies based on how long you owned the stock. If you sell the stock after one year from the exercise and two years from the grant date, you will receive long-term capital gains tax treatment. If you sell stock within one year of exercise or two years of grant, your gain will be treated as ordinary income. You may also be subject to the Alternative Minimum Tax. Please discuss all tax considerations with your tax advisor.
- WHO DO I CALL IF I HAVE QUESTIONS ABOUT MY EMPLOYEE STOCK OPTIONS?
Call the Morgan Stanley Service Center at 866-722-7310 (toll-free) or 801-617-7435.
Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors do not provide tax or legal advice. Clients should consult their personal tax advisor for tax related matters and their attorney for legal matters.