Pros & Cons of Reloadable Stock Options
The topic of reloadable stock options is fairly complex. Stock options differ from actual ownership, in that options simply give the right to sell a certain amount of stock at a pre-determined price before a certain date. Options often go to senior employees of firms as a means of increasing compensation.
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Features
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An option simply is a right to sell at a specific price. For example, you own 100 shares of stock valued at $10 each. You have an option to sell for $20 per share within the next year. If the stock goes to $30, you then can sell the stock for $20, and then sell the shares on the open market, making a profit of $10 per share. The "reload" is when you can "reset" the strike price at $30. The stock then goes to $35, and you can then re-sell your stock and make that $5 profit per share. This means your stock is worth more on the market than your agreement with the firm. You pay the strike price and sell the shares.
Benefits
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The primary benefit of reload stock derives from the profits it permits the holder to make. The government normally taxes reload profits as a capital gain, not as ordinary income. Under normal circumstances, this means the tax on this gain is lower. Beyond that, it places the stock with those who actually have a personal stake in the company.
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Advantages
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If someone owns valuable stock in the firm they help manage, it creates an additional incentive for quality work. In addition, it empowers the employees who have risen to the top of the firm to have voting rights in the company itself. The great benefit here is it is a built-in means of rewarding intelligent and rational management.
Problems
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Some see this as another way to enrich high-ranking executives. Options are not easy for the layman to grasp, and they can net a large profit not reflected in the formal salary of the executive. It is a perk potentially worth quite a bit of money that ordinary workers and lower-level white-collar workers do not have. It does increase the amount of administrative work in the firm to track the stock moving around.
Disadvantages
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A reload can diminish the effects that falling stock prices might have on the option holder. Options are valuable rights that you can buy and sell. One complex problem associated with reloads is the possibility of dilution. If the company issues more stock to pay for the option, this means the number of shares increase, and the value of each share decreases. Printing more paper means the individual shares are worth less.
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