Best Practice changing ISO and underlying security at time of IPO

jrm

I've worked with ISOs over the years, and before the RSU addition had found a work around for that tracking, Brooding on best method for handling an IPO for ISOs that also have some exercised shares.

If it were a 1:1, I would just add the ticker my security's detail, include a note as to the IPO date and call it a day. However there was a split involved and the exercise of a small option subset

Goals.

1. change number of options based on the split
2. have the option price appropriately reflect the split
3. have the underlying stock (and existing shares exercised) reflect the correct quantity/basis due to split
4. reflect the FMV on IPO

Methods I am considering testing — created a File copy starting at the earliest ISO grant date that I need to test:

1. do as mentioned above,
   1. leave the existing Option account and its underlying security (and account to which I transfer the security)
   2. add the ticker to the underlying security
   3. manage the split
2. Handle split, then add ticker
   1. leave the existing Option account and its underlying security (and account to which I transfer the security)
   2. manage the split in the underlying security and check if it adjusted the options
   3. add the ticker
   4. check basis, etc
3. Use the corporate securities spin-off action
   1. create a new security with the ticker
   2. execute a corporate securities spin-off action in the account for the actual shares owned (previously exercised)
   3. check appropriate shares/basis
   4. reflect IPO FMV

I haven't tested any of my scenarios yet, as I figure there may be others who have previously done this and can share their wisdom, as well as the folks who haven't done this but can share their wisdom as to what I am not considering. (decades of Q use/data that I'd prefer to keep "clean", here is why I keep brooding on the subject.)

Thanks!

QWin R60.20 Build 27.1.60.20

Win 10

Tom Young

I have never personally had ISOs so no practical experience here. Using the spin-off action in the Account with owned shares would deal with the split properly you would think, but unless the spin-off wizard will accept $0 as the parent stock's value, (haven't tried it), you'd end up with some amount of basis left behind in the parent stock. That should be an easy test to perform in a test file and if $0 for the parent doesn't work, you don't have to go down that path.

Just for the sake of clarity, that first sentence "…method for handling an IPO for ISOs that also have some exercised shares" is stating "in the past I've exercised some ISOs and the real stock is in a real brokerage Account", right? What's confusing me is the last part of the second paragraph sentence "However there was a split involved and the exercise of a small option subset." Was the split and the exercise mentioned here simultaneous, i.e., at the same moment as the ISO you exercised some options? If that's the case then I wouldn't see that as a complicating factor. Either "exercise" on the day before the split and have the correct # of shares and basis over in the real Account when the split occurred, or vis a versa. For me the big unknown is if Quicken is smart enough to understand that a real-world stock split has a ripple effect over in the ISO options Account.

mshiggins

In the past when I had ISOs combined with splits or corporate mergers, the only workable approach was to expire the grants that had not been exercised using the date of the event, then creating new ISO grants using the new share quantities and prices.

jrm

@Tom Young ISOs were granted and vesting occurred as scheduled (both in actuality and within Q). A couple years pre-IPO there were vested options that were exercised and held — not in a "traditional" brokerage account, but administered by a 3rd party entity that does ISO management. These exercised shares could not be traded on the the open market (not a public company) nor transferred to others. However, they do in fact have basis.

Let's say Company ABC

Grant 999 for 4,000 shares vests over four years with 1,000 options vested per year grant expiration 10 years from grant date (common time frames.) In Year 3, 3000 shares have vested and are exercisable and 500 shares were exercised at $1.00/sh (total cost $500) and a FMV of $1.50/sh. For those exercised shares, I need to keep track of the $1.00/sh paid price, as well as the $1.50/sh FMV for tax purposes.

On IPO, ISO (and the associated exercised shares) have a reverse 1:5 split, so now Grant 999 has a total of 800 shares ($5/sh cost) and the 100 exercised (owned) shares with a cost basis of $/sh and a $7.50 FMV on date of exercise. FMV on date of ISO = $10 so the exercised (owned) shares would have a value on IPO of $1000

@mshiggins in your situations, had you ever exercised any options prior to the splits/corp mergers for which you expired the grants and created the new ISOs? I understand how to do what you propose. So, in the scenario I laid out, for the ISO, I could expire Grant 999 and create Grant 999-new. It's underlying stock for ABC-new would have the appropriate ticker to track the value. I would enter Grant 999-new with 800 shares and strike price $5.

I'm assuming you used the original grant date and vest schedule. This now populates out the vesting schedule in the options account. In my scenario, would you then, "remove shares from account" in the ABC account of exercised shares and in the Grant 999-new enter in the exercise with the actual date, the post split number of shares, etc.?

It seems so easy in my head, I think I am making it more complicated trying to explain what I wish to do.

jrm

In testing, I thought I had it working without having to expire the grants and creating new ones. Yet, the strike price doesn't get rounded and the reprice action only allows the option to be repriced at a lower amount, and I need to round-up essentially a penny. This of course, would affect any tax reports, but I am trying to decide if the trade-off to use the stock split is better and manage the tax reports, or if I go through what @mshiggins did an expire than create the new grants. Anything else I could be missing, or messing up, if I leave with my test process below?

Thanks.

I entered a (reverse) stock split transaction on the underlying security with a Jan 2025 date (for which I have not yet entered the ticker.) These are the pre and post holdings

I then did a same-day-sale exercise

Looking at the register, the the grant and vest transactions reflect the original share qty at the time, yet, the total balance shows that the share qty was reflected correctly both for the shares that were exercisable prior to the split and the shares that vest post split