> My amazement with this article is that somebody as recently as March 2000
> had 100K shares of Cisco at between 5 and 10 CENTS each. And they describe
> this guy as an "engineer". WTF? Did he join way early and never ever
> cash out earlier? 100K options in a mature company like Cisco sounds
> like exec level compensation to me!
It looks like Cisco was at a split-adjusted price of between 5 and 10
cents in 1990, so that's probably when he joined. Given the splits
since then, 1,000 shares in 1990 would be 288,000 shares today.
So it's not a matter of "executive compensation" -- just joining early
and staying long at one of the most successful companies ever.
Further, he may have only exercised because he had to; don't most
incentive stock options have a 10-year expiration?
I feel for the guy because the AMT law is dumb, making people pay
taxes on gains that are never recognized by a sale.
On the other hand, every company with a well-run ISO plan explains
the tax consequences of exercise to its employees. The moment he
exercised his options, he must have known that he would owe
$1.8 million in AMT taxes for 2000. He was probably figuring on
paying it with a margin loan against the shares, or assuming that
he could sell the shares right about now, after the 1-year
long-term holding period, to pay the bill.
As Cisco slowly slid over the year, he could have covered the
tax bill, or negated it by selling his whole position for
a short-term capital gain. (There were a rash of articles about
this potential problem in December of last year, and any
competent tax/financial advisor would have said something
about setting money aside for the taxes.)
Yet again, the tax system subtly discouraged action: in hopes
of saving the short-term/long-term tax difference, it encouraged
this guy (and many others) to "hold on" in hopes of price
stability or recovery. After all, at any point in the slide,
you would have to believe that the stock would fall yet another
15-20% in order to make it worth it to take the immediate
short-term tax hit. Of course, everyone always wants to believe,
"it has nowhere to go but up from here".
So, the AMT tax law sucks, this guy could've protected himself
better, but I understand the psychological trap he got into.
- Gordon
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