For the uninitiated, stock options work by allowing the owner of the options the chance to buy a specified number of shares, at a specified price, over a specified period of time. It all sounds relatively simple, but the terminology can prove confusing. For example, the price at which you can buy stock is called the strike, or exercise price. Usually, employees earn the right to exercise their options at this price after having worked for a company for a predetermined amount of time. This is called vesting, and different companies use different models to specify how shares vest. A common model used by many Hong Kong Internet start-ups allows annual vesting spread out evenly over four years. Thus, every 12 months, an employee vests 25 per cent of the shares. This allows the worker to buy a quarter of his share options one year after commencing employment. Upon vesting, an employee can immediately buy their shares at the strike price. They can then sell the shares at the market price, which is where the whole scheme can become particularly lucrative. If the company's price is considerably higher than the strike price, the lucky employee pockets a fat profit. Alternatively, you can buy the stock and wait in the hope the share price continues to rise, or you can simply wait and not buy at all. After all, regardless of the market price on the date you choose to buy, you will still only have to pay the exercise price. This is the approach often taken by senior executives who, significantly, have financial advisers to assist them. Whatever else you choose to do with your options, do not under any circumstances underestimate the tax implications. This is the advice of Gary James, a member of the international tax group of accountancy firm Grant Thornton. 'All too often we find that employees are unaware that they could face taxation liability,' said Mr Johnson. In Hong Kong, the tax position is, thankfully, fairly simple. The employee pays standard salary tax on the difference between the exercise price and the market price on the date the options are bought. The only difficultly in this is if you choose to exercise prior to the company's IPO. In such a case ascertaining market price becomes a major headache. However, the chances of someone exercising their options before the IPO windfall must be very slim. Due to the refusal of the Government to introduce tax incentives for option schemes, all schemes are, basically, the same.
