Taxes and Jobs . . .

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The Register said the other day, “Jobs dumps Apple stock.”

Well, did he?

Here is what actually happened. Mr. Jobs had been granted an option to get 10 million free shares of Apple stock by a certain point in time (to make a long story short, these ten million shares were the culmination of Job’s stock compensation since he came back to Apple). That certain point in time arrived, and he exercised that option.

Generally, the exercise of a stock option is taxable based on the gain (the difference between what the person bought the stock for, and what it was worth at the time he exercised the option), the person gets when he or she exercises the option, and the gain occurs when the stock option is exercised, not when the stock is sold. In Mr. Jobs’ case, it was about $650 million dollars, which is a lot of gain, and a lot of tax.

Since not even Steven Jobs has $300 million in spare pocket change, he had to sell a sizable chunk of these ten million shares to pay his taxes, And so he did, here’s is the required government SEC document reporting the transaction.

The only thing that might look a bit funny to the average person about the transaction is that instead of selling the shares on the stock market, Apple bought the shares back from him at market price to pay his taxes, but that’s a common practice. Again, to make a long story short, it makes little difference to Apple’s financial position which way the transaction went.

Based on the amount sold, it looks like little if any cash is going to end up in Jobs’ pocket as a result of this, and it certainly shouldn’t be taken as a “dump” or a sign of lack of faith in the company.

Indeed, if you look at other tech companies, the typical pattern of options exercises by executives is more “take the money and run” than Mr. Jobs. With few exceptions, when most tech execs exercise an option, they immediately turn around and sell most or all of their shares.

For instance, at the end of January, AMD CEO Hector Ruiz exercised options on about 250,000 shares. Let’s see what he did:

First, he had to exercise the options, which basically gave him the right to buy certain amounts of AMD shares for certain (relatively low) prices. To exercise the options, Mr. Ruiz had to lay out $3,133,499.

At that time, these shares were worth about $40 each, so these 250,000 shares were worth about $10 million. Exercising these options gave Hector a gain of about $7,000,000. For Hector, the taxes on this gain were about $2.4 million. How do I know that? I know that because AMD did the same with him that Apple did with Jobs on about 59,000 shares of stock. Go here and here for verificiation.

So Hector had to come up with around $5.5 million just to exercise the option and pay the taxes on them. Only any amounts exceeding $5.5 million would actually end up in his pocket.

In this instance, Hector actually sold ALL the stock, so he ended up with about $4.5 million, but he still owns about 250,000 shares of AMD stock, so he’s hardly bailing out of the company, either.

More recently, Paul Otellini, the new head of Intel exercised options on 192,000 shares of Intel stock for about $1.5 million, and immediately sold all of those shares for about $3.8 million, so he put money in his pocket, too. Then again, he still has about 800,000 shares of Intel, so he’s not exactly dumping, either.

Something Amusing

The only item of interest, and it’s more amusing than anything else, is that prior to this ten million share transaction, Mr. Jobs didn’t seem to actually own any Apple stock. Outside of a yet unexercised 120,000 share option, all his stock option items were bundled into that ten million share package.

However, it’s only an item of amusement because it’s not like Mr. Jobs was regularly getting stock options and cashing them out as soon as he could. He wasn’t. He was granted tons and tons of options since he came back, but due to Apple’s stock price, they were worth little to nothing, so all those options got rolled into this ten million share deal a few years back (which would have been worth a couple hundred million even if Apple hadn’t had its iPod surge). But, after paying his taxes, he’s leaving the rest of the chips on the Apple table, so he can hardly be accused of lack of faith.

Ed


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