Nil Cost Options (NCO) and Sell To Cover

[GTPork]

Hi all

Interested in views on my situation if anyone has any…

- UK employee, resident, tax payer etc.
- Employed by UK company which is listed on the NYSE.
- High risk start up company with a current share price around the $2 mark, but if we can deliver the business plan the Barclays target price is $30-40.
- Decent value of NCOs that vest quarterly for 5 years.
- Salary just over £100k but sacrificing 18% to pension.

Following each vesting period, I’m given the following 3 options on how to treat my vested shares:
1) Sell at market price
2) Sell to cover (NI and income tax at marginal rate)
3) Do nothing

Only two quarters have vested so far. First time around I opted to sell to cover and now faced with the options again.

I’m not considering option 1 as the upside is worth holding out for. The question is whether sell to cover makes more sense than do nothing if I can keep below the 60% tax trap.

Am I wrong?

[LooneyTunes]

GTPork said:

- Employed by UK company which is listed on the NYSE.
- High risk start up company with a current share price around the $2 mark, but if we can deliver the business plan the Barclays target price is $30-40.

There’s a bit of a contradiction there, high risk start up vs already listed on a major exchange?

Are Barclays advisers to the firm, or is the price target one from their analysts?

The big thing to remember with any job where you have equity/equity-like arrangements is your risk concentration. Building equity value adds to your paper wealth whilst the company value grows and you live off the income. If it all goes well then great. If it doesn’t then, in extremis, you face loss of job and loss of that paper wealth. That’s quite a different situation to the one faced if you liquidate and reinvest proceeds elsewhere.

[GTPork]

I understand how it might sound like a contradiction. The business started around 6 years ago but it will be “pre-revenue” for a few more years yet and has some high hurdles to overcome in that time. The listing was via a SPAC merger on the NYSE late 2021.

I’m familiar and fully appreciate the advice around wealth concentration. The currently vested shares as a proportion of my overall cash/equities holdings is low

[LooneyTunes]

I'm very bearish when it comes to SPACs... I've seen some total crap get acquired via that route, at crazy valuations, by people seemingly with money burning holes in their pockets.

If you're holding out for a higher value, tax treatment/future liabilities combined with a view around risk should probably be what makes the decision for you.

Employee equity schemes and awards vary, both within and between UK vs USA when it comes to staff equity, but it would clearly be a bad outcome to:
1) Defer tax and then see values fall (or even go to zero) such that you had a tax liability outstanding (based on initial award) that you were unable to cover that when it fell due; or
2) See any later returns taxed as income rather than subject to CGT if that was avoidable by acting differently early on.

Firms sometimes produce indicative guides for employees around how schemes work. It'd be worth seeing if they have done that for UK employees.

[GTPork]

I fully understand that. Responding to the two points..

1) Grant of options (combination of CSOP and NCO) don’t come with a tax liability at grant, only at exercise. There if it goes to zero and not exercised there won’t be a liability. As I understand it.
2) This is exactly my question. I have the option to ‘sell to cover’ the tax due on the NCO portion quarterly on vest or sit on them.

At todays low valuation that sell to cover income tax liability will keep me below the 60% tax trap. With future gains being subject to capital gains tax only. Again that’s how I understand it.

To me I don’t see a downside to not following this route (eggs in one basket argument aside)

[supersport]

There’s two sides to it.

Holding wealth in your employer is often risky, If it goes wrong you lose your salary and your wealth.

But at $2 you would need a lot to be of any real value,

There this thing called time baked in. So you are best not doing anything until you actually want them.

So just pay income tax in the future when exercising rather than income tax now and the CGT later. You would need to do the sums, especially now the CGT allowance has changed.

[GTPork]

Let’s put it this way. At the current price it’s a “nice to have” sum of money but at the target price it’s a “pay off mortgage” sum of money.

I ran a couple simulations yesterday in excel at different share prices. The lowering of the capital gains tax threshold appears to have made it very close in terms of net proceeds. So dealing with the tax in one go through PAYE would be much more straight forward than each quarter and then capital gains at the end.

Plus who knows what rule changes the next lot in power will bring in.

So looks like ‘do nothing’ is the best option