Employee stock option confused on how to enter

Nikster

My husband has an employee stock option. I don't understand all of the lingo, so I am having problems setting this up in Quicken. He was granted 10 shares in 2016, which were all vested in Nov 2017. I have the grant set up, I think, accurately. When I choose to exercise the grant option it is making the cash balance go negative. The grant was for $116/share, he purchased 6 units at $79/share and we had chosen to use the rest to pay the taxes.

Do I need to reprice the Grant share price since it is different?

How do I record that the other 4 shares went for taxes?

How do I prevent the cash balance from going negative?

Tom Young

"Maybe the problem is that this bonus shouldn't be treated as an Employee Stock Option?"

Yes, I think you're right.  I almost said something about this when you reported that "It is a non-qualified plan" instead of saying "it was a Non-qualified Option", but I let it slide, because you mentioned "he purchased 6 units at $79/share", and that's why I used the term "exercised."  But I take it that was a misstatement?  There was no need for your husband to come up with $79 per share to acquire the stock?

Based on you subsequent posts it sounds to me like this was not a "NQSO" but was instead either a grant of restricted stock units (RSU) or a restricted stock award (RSA). 

(All employee stock incentive programs are considered either "statutory programs" or "non-statutory programs", and are accorded different tax treatment.  NQSOs, RSUs and RSAs are all non-statutory programs.)

Generally under either an RSU or RSAs when the stock "vests" the grantee receives the stock without any out of pocket payment to acquire the stock. However, the stock is certainly not "free money" in the sense that the 10 shares he acquired are somehow tax free.  The full amount of the award (10 x $116 = $1,160) is counted as compensation, and taxed as such.  This compensation as well as the taxes withheld will all show up on the W-2.  And, very importantly, your husband will have basis of $116 per share for this stock.

(I don't know if you noticed this or not but the entries above created a "compensation" amount of 10 x ($116 - $79) = $370 using a Category of _EmpStkOptInc; this was the "spread" between the shares FMV at "exercise" and the amount paid to exercise.  The new equation here is 10 x ($116 - $0).

At this point I'd suggest you might want to delete everything in the Account you created and starting over. 

1. If all you want to do is get the stock properly into the Account then a simple "Add" action will do that.  You'd tell Quicken the purchase price was $116/share and the date of acquisition was the date the stock became your husbands.
2. Although Quicken doesn't have a "wizard" for RSUs/RSAs, you actually can go the NQSO route by telling Quicken the exercise price is the smallest number Quicken will accept ($.000001) and then you can actually make the entries that accompany the transaction.

Tom Young

I assume this is a NonQualified Stock Option (NQSO).

"Do I need to reprice the Grant share price since it is different?"

I'd guess you're wrong here since exercise prices on NQSOs shouldn't change.  I'd guess the "fair market value" of the stock on the exercise date was $116 and that doesn't affect the original grant.  It will affect your husband's "compensation" income, (the "spread" between the $116 FMV and the $79 exercise price will be included you your husband's 2019 W-2 as compensation), but we'll leave that alone right now.

It's unclear exactly how the option was exercised. There's various ways the exercise can occur and depending on the method used your husband could end up with all 10 shares "in hand", end up with no shares "in hand", or end up somewhere in between 0 and 10 shares "in hand."   Without knowing that granular detail it's difficult to be precise in how you might go about making your entries.

One method of exercising - maybe the method your husband used - is a "sell to cover" transaction - enough shares are sold to provide the money for both the exercise ($79 x 10) and the taxes, combined with a "same day sale" of any remaining shares.  In this case the grantee ends up with no shares, cash in pocket, and required withholding taxes paid.  In this case you would exercise all the shares using the "Same-day Sale" option.  This would then leave money in the Account, money you could use against "Miscellaneous Expense" actions to account for the money used to pay taxes.

Nikster

Thank you for your answer. My husband called Fidelity and we got a couple of questions answered. It is a non-qualified plan. The 10 shares granted in 2016 were vested in 2017. He received 6 shares and the other 4 shares went for taxes. He kept the 6 shares and didn't sell them. I think I was misunderstanding the term "exercise" which I now believe means to sell the granted shares. So, in this case, how would I best enter this into Quicken?

Tom Young

Things are still not entirely clear here but I believe I can give you the correct entries by making a few assumptions.

"Exercise" is not a term that means "sell", though an exercise and sell can occur simultaneously.  Your husband was not obligated to exercise the option; if the market price of the stock never exceeded the strike (exercise) price there would be no point in exercising as you'd end up owning stock that was worth less than you paid for it.

In order to exercise the option for 10 stocks at $79/sh your husband was obligated to come up with $790 paid to the the company. 

Assumptions:

1. The grant was for 10 shares with an exercise price of $79 per share
2. Husband paid to exercise with cash out of pocket, i.e., $790
3. Fair market value at exercise date was $116 per share
4. Four of the shares were sold "for taxes"
5. Husband ended up owning 6 shares.

The attached picture shows the various entries and they may not be the exact entries you need but they should give you some hints to the path of correct entries for your situation.

Nikster

Thanks again for your help! The photo helped a lot. I added the transactions for the "same date sale" and the "exercise and hold" as you have above. My husband didn't have to pay anything for the shares since this was simply a bonus that he received based on the store's sales. So, free money! The 10 shares were just vested & then they were his. (He didn't have to pay anything for them (no cash out of pocket)). At the time of vesting, they asked if we wanted to have taxes taken out then or if we wanted to deal with paying them later. We opted to have them taken out then because this was all just extra money anyway, that we hadn't had before.

Quicken keeps telling me that if the shares were granted at $116/share and when they were vested at $79/share that we are losing money. (Maybe that is why my cash balance on this account goes way negative when I followed your example in the photo?) When my husband spoke with Fidelity, they told him that the share price at grant date was irrelevant in this situation. Maybe it would just be easier to skip the whole vesting/grant entries and just do an entry for adding shares when they are vested? I haven't been using Quicken for calculating taxes, so I don't worry about that as much as I do worry about having the accounts match the statements exactly. Maybe the problem is that this bonus shouldn't be treated as an Employee Stock Option? I may have confused myself from the start.

Tom Young

"Maybe the problem is that this bonus shouldn't be treated as an Employee Stock Option?"

Yes, I think you're right.  I almost said something about this when you reported that "It is a non-qualified plan" instead of saying "it was a Non-qualified Option", but I let it slide, because you mentioned "he purchased 6 units at $79/share", and that's why I used the term "exercised."  But I take it that was a misstatement?  There was no need for your husband to come up with $79 per share to acquire the stock?

Based on you subsequent posts it sounds to me like this was not a "NQSO" but was instead either a grant of restricted stock units (RSU) or a restricted stock award (RSA). 

(All employee stock incentive programs are considered either "statutory programs" or "non-statutory programs", and are accorded different tax treatment.  NQSOs, RSUs and RSAs are all non-statutory programs.)

Generally under either an RSU or RSAs when the stock "vests" the grantee receives the stock without any out of pocket payment to acquire the stock. However, the stock is certainly not "free money" in the sense that the 10 shares he acquired are somehow tax free.  The full amount of the award (10 x $116 = $1,160) is counted as compensation, and taxed as such.  This compensation as well as the taxes withheld will all show up on the W-2.  And, very importantly, your husband will have basis of $116 per share for this stock.

(I don't know if you noticed this or not but the entries above created a "compensation" amount of 10 x ($116 - $79) = $370 using a Category of _EmpStkOptInc; this was the "spread" between the shares FMV at "exercise" and the amount paid to exercise.  The new equation here is 10 x ($116 - $0).

At this point I'd suggest you might want to delete everything in the Account you created and starting over. 

1. If all you want to do is get the stock properly into the Account then a simple "Add" action will do that.  You'd tell Quicken the purchase price was $116/share and the date of acquisition was the date the stock became your husbands.
2. Although Quicken doesn't have a "wizard" for RSUs/RSAs, you actually can go the NQSO route by telling Quicken the exercise price is the smallest number Quicken will accept ($.000001) and then you can actually make the entries that accompany the transaction.

Nikster

Thank you so much for all of your help! You are indeed a super user!