I realize Fallon makes a CEO's salary, but that's still a pretty hefty chunk of change to put up, especially considering how choppy Infinera's stock performance has been.
I don't normally like grabbing quotes off Twitter, but that on was hard to resist.
Umm one huge difference is the tax consequences and it is not noted in the min-blurb.
An RSU is taxed when it vests. So basically you lose about 1/3 to 1/2 of the value to taxes almost immediately.
There are actually two types of Stock Options ISOs and Non-Quals. Both kinds have tax consequences when they are sold. ISOs are the ones that can be exercised and held. They are also limited in the value that can be distributed in a tax year based on the value of the strike price. The advantage is (theoretically) you can buy and hold an ISO to get them to LTCG instead of being taxed as regular income (like STCG is at the moment). There are 2 risks. First, the value of the exercise (value at the time of exercise - value of the strike price) is subject to AMT. Second, the value of the ISO can fall post-exercise. This is really bad from a tax standpoint because the AMT value of the transaction does not change. The only way to avoid AMT at that point is to sell the ISO at the new lower price - which can really suck.
I think the big RSU advantage from a company standpoint is that it eliminates a lot of long term overhang in the number of shares outstanding. With RSUs you have a very good idea of when they become real shares. With Stock Options it can be highly variable in the calculation of outstanding shares if there is a lot of options outstanding and the eps could be impacted (Cisco used to have that challenge not anymore I am guessing).
Very good advice. Though I would argue #5 is a bit sweeping, obviously it depends on the price you pay. Intel at a 9 PE paying 4.5% dividend seems like a possible exception to your rule.
What was interesting about the options transaction was that as you point out Seven taxes must be paid on the difference between option price and market price at exercise. Most people simply sell the shares so that they don't face the risk of paying taxes on a gain, only to loose the gain if the stock falls.
The options that were exercised didn't expire for almost 4 years, they were not RSUs. One wouldn't exercise these shares and pay the taxes unless they expected the share price to climb within a year and they wanted to start the clock on LT capital gains.
The only other reason would be if one had a lot of losses in a given year and they were seeking capital gains to offset them. But if this was the reason then why would shares also be bought in the open market - so exercising these options would support a positive long term outlook for the company.
The only other company I've observed this taking place in this sector is Clearfield (CLFD) where there has been large insider buying and exercising.
As I have posted here before, I was with AFC and also saw what happened at Calix early on.
AFC had a unique option feature - the exercising of unvested options. The idea was to allow employees to exercise when the price was miniscule and hold to post-IPO results. This basically eliminated the AMT concerns for folks if done right. The problem was is that some people used that in 1998 post-IPO. If you go look at a stock chart from then, you will see AFC's trouble post-GTE/China (stock wise anyway). The loss of the CEO was compounded on this and this led to a 90% drop in value over the first 9 months of the year (there was a small recovery in the Q4). There were 2 problems with this. First, people could not sell those unvested shares and had HUGE AMT issues. Second, the stock hit low enough that people had margin calls in their brokerage accounts (imagine financing your home with a margin loan - it did happen).
Calix provided people with loans to allow them to exercise early and start the LTCG clock. This was early on and some folks took advantage of it. Of course, the IPO took a really long time AND there was a big layoff in the early days. People had the bank call the loan at the termination of employment. Which was a problem since people had been paying it off using payroll deduction. Another tough spot.
So, yes I have always same day exercised ISOs (in other words treated them as NonQuals). I am a conservative investor by nature and have seen what can be horribly wrong when you don't cover yourself. I have 5 humorous rules for investing (and I will put my sountrack next after each rule).
1 - Buy Low - There are a good number of momentum investors out there. Me I invested in Real Estate after the bubble collapsed. Buy at the bottom or low. The popular (like Social Networking) means high valuations for not obvious reasons.
2 - Sell High - The other half of 1. Which leads me to...
3 - Take a Profit - You have to have a sale price on any investment. That includes companies by the way. I can not tell you how many times post-optical bubble I heard..."But Cisco offered me $500M a year ago!" And I would think, "And you should have said YES!"
4 - Pay the Taxes - These two posts are all about that. If you are paying taxes then you are making money, but risk based on tax avoidance has to be weighed like any other risk.
5 - Never, EVER, invest in Tech - This is my statement about risk. Do you think Infinera's employees truly understand the future of their company? If you think they do, I can offer 1,000 versions of them not understanding it. If they don't how can you? If you can not predict how exactly they will win, why (for the love of God) are you paying a huge premium for that priviledge of riding their risk. Now as the high risk/reward part of your portfolio...okay. But seriously, consider how much you have at high risk!
The problem with investing is that emotion gets tied up in it. I recall AFC's CFO doing an Investing 101 class for employees during the Optical Bubble. He put up all kinds of numbers that showed how overpriced the market was and that we were all fools for holding onto our tech stocks. He was right and sold nothing himself. Which meant even HE could not buy his own logical arguments. Too much emotion not enough cold hard logic.
I actually would argue that Intel is no longer a tech company. I am not implying that they have a technology basis, but so does Proctor and Gamble. What I mean is that they are competing on a basis of a broad portfolio with significant stability in their markets. My statement is meant to apply to single product companies (see Infinera) or markets that are under going disruption (see Natural Gas Production).
Would have been funnier if he bought Ciena shares.
Or Tellabs.