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Retirement
Those worthless options
November 13, 2000: 8:21 a.m. ET

What to do with your stock options after your dot.com ditches you
By Staff Writer Jennifer Karchmer
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NEW YORK (CNNfn) - Amid a string of dot.com flameouts that have riveted Wall Street in recent weeks, many people at start-up jobs are whispering the dreaded "L" word and panicking about their paychecks.

But another bleak problem for thousands of Web workers is that the dot.com carnage has made their stock options worthless. And for many, the options were the closest thing they had to a retirement plan.

"It's a huge hit for people and it's unprecedented for people with stock options," said certified financial planner (CFP) Michael Boone, in Bellevue, Wash. "It's widespread pain being felt by people whose compensation is exclusively tied to stock options."

Dot.com defeat

The news has been anything but good for Internet companies.

Online pet supplier Pets.com just announced it was shutting its doors and laying off about 255 of its 320 employees. Web discounter Priceline.com cut about 16 percent of its workforce, laying off 87 of its 535 employees.


Click here to read CNNfn.com's special report: dot.com shakeout


Another Web site, Freeride.com, which allows users to earn points to buy stuff, cut about half of its staff, based in New York City.

"We had a meeting with executives two weeks before, saying things are tight, but that we have enough money until the end of the year. Two weeks after that, they fired everyone," said one employee who didn't want to be identified. "They had a huge meeting where they gathered us in the hallway."

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  For younger workers to just blow off 401(k)s and think that options are it, is an incredibly risky perspective.  
     
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  Brent Longnecker
Resources Connection
 
The Freeride.com employee said he was attracted to the job more for the down-to-earth atmosphere rather than the options. Plans to take the company public never panned out.

"People who go to work at these companies are relatively young, and they're doing something fun and aggressive and they're living on the edge," Boone said. "They're not looking for a pension. It's more about the work environment.

Options, options, who wants options?

Stock options have made millionaires out of some people. The dark reality is that for most people, options can be worth nothing more than the paper they're printed on.

There are incentive stock options (ISOs) and nonqualified stock options (NQSOs), and each has different tax consequences. Both are nothing more than options to buy stock at a set price.

  graphic CUSHION THE BLOW  
   
  • Don't rely on options for retirement
  • Check the date you got the options
  • Check when the options expire
  • Open an IRA
  •    
    It's important that you keep track of the date you got the options, the earliest date at which you can "exercise" your options and sell the stock, and the expiration date. These dates and prices will help you determine the tax consequences of cashing in the options at various times.

    What are the options with your stock options?

    You've finished cleaning out your cubicle and now you're pondering other job options by surfing the Internet. But what do you do with those stock options that initially made you see dollar signs when the company discussed promises of an IPO?

    graphicWith many dot.com stocks declining, it tends to mainly be the most recent hires that are hurt, because their options are newest. Their exercise price is nearer or above the current price, deeming the options worthless unless the shares rebound before they expire, which is typically 30 or 60 days from the date of your lay-off, depending on your employer.

    It's possible that the company's stock could recover, but unlikely, so it's best to go ahead and exercise the stock, suggests CFP Barry Vosler.

    "You can try to get into timing issues with an investment, but it's easier to get that monkey off your back," he said. "I think we're still in the early cycle and we're still going to see a lot of [the dot.coms] disappear."


    Click here for more career advice from CNN.com


    Cushion the blow

    Unfortunately, most dot.coms don't offer 401(k)s, so what to do with that type of account isn't usually a factor for laid-off employees. But if you were lucky enough to work for a company that offered a 401(k), now's the time to roll that money into an IRA, planners suggest.

    IRAs usually offer a wider range of mutual funds to invest in than most company 401(k)s, so you'll have greater flexibility. Plus, if you decide to take the plunge again and work for another dot.com, you'll have a separate retirement account already set up, so you won't have to rely on stock options for long-term savings.

    "Pray that your stock options do well and don't give up on the normal ways of retirement savings," says Boone, who suggests investors open a traditional IRA or Roth IRA account solely for retirement. "You need to be doing [IRAs] even when your biggest fortune is stock options."


    Read CNNfn.com's Tech Watch


    In addition, you should open a money market account, which typically returns about 6 percent these days -- higher than most bank savings or checking accounts, which offer closer to 2 percent.

    "For younger workers, for them to just blow off 401(k)s and think that options are it is an incredibly risky perspective," said Brent Longnecker, executive vice president with Resources Connection, a Santa Ana, Calif.-based company that consults on compensation. "They need to understand how to utilize an options package and what are the risks associated with it."

    The Freeride.com employee who was recently laid off is doing freelance work, like many of his fellow idled workers.

    But would he work for another dot.com venture if the opportunity presented itself?

    "Sure. You just have to find another company that has a decent business plan," he said. graphic

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