If you don't see alex carp exercising as of august, which is the beginning of the vesting date of the new batch of options of that 141 million, if you don't see exercises as of august 2021, you should be worried. My name is tom nash and i quit my corporate job as a senior financial analyst to break down companies for you there's one thing you need to know about me: i don't take from anybody. Ladies and gentlemen, news just broke hell just throws over because literally i'm making a video about stock option taxation, which is a topic. I've never thought to be of any interest to anybody, but a few nerds that i used to work with.

But i guess now it's interesting because you guys have been asking me a lot about it. There's so much confusion. A lot of people who don't understand taxation are talking nonsense and in this video, i'm gon na set the record straight because my previous video created a lot of confusion about technicalities that needs to be addressed here on reddit on social media. So i'm just gon na make this video to make things clear, but first of all good morning allegedly squad.

This is your friendly former senior financial analyst tom, currently a youtuber here to bring you the news without any agenda, i don't hype, i don't fear monger. I just bring you the nuance news without anything to sell no courses, no software, no bs like this. I don't pretend to be anything but the guy who actually explains to you. What's really going on in this video we're going to tackle a little bit of a difficult topic, but you know me i'm going to make it interesting.

The only thing i want is just your attention. Don't click, nothing, don't smash, nothing don't buy. Nothing. Just give me attention and i'll teach you about stock option, taxation and i'll.

Show you why, as crazy as it sounds, the fact that alex carp is actually exercising options right now means he has the utmost faith that the share price will go up. I know that sounds crazy, but trust me i'll prove it to this video using numbers and facts. No opinions check this out now. First of all, let's talk about the three points that i keep hearing on social media and on reddit that are total nonsense and i'm gon na break it down to you right now.

First of all, a lot of people are saying well tom. He just sold 450 million worth of profit right, so he doesn't need to sell any more shares in the future. He has now enough just to cover the entire option grant right, so we shouldn't see any future sales. Should we no.

We should and i'll explain a second why? The other thing is i keep hearing on reddit. Mainly there was a guy basically saying well tom. This is capital gains tax. These are employee stock options.

Another mistake i'll explain why this is definitely not capital gains tax and the reason why it's important, because if it was capital gains tax, the taxation rate would have been 20, but it said it's actual income, which means it's in the 40 41 range. If he's in colorado, the third point is, which is the most interesting one: well tom: he just got the 141 million grand in august 2020 and it expires in 2032, so he shouldn't sell it now. He can just wait and exercise this in 2032, so we shouldn't see any more sales again wrong. I'm going to show you exactly why so, first of all, the one thing we have to be clear about is terminology.

So, let's talk about the three main events in any option plan. If i'm an employee, there's three events in any option, there's the grant the company gives me the option, there's the investing event. Essentially, the company gives a schedule upon which the actual option, this there's the exercise event, which is a point where i'm going to say, hey. I want to exercise this option.

I want to buy the share for the price. The option allows me - and i want to get a piece of the company and, of course, there's one more stage - that's kind of external to the company, which is me selling my shares and actually selling it to a third party outside of the company. So that's the whole life cycle of an option within the esop employee stock option plan universe. I guess right.

So what are we talking about here? So alex carp right now holds 81 million shares of palantir. Now those are basically, i think, 85 million of class b shares and the rest is class. A the only difference is voting rights and there's a whole voting mechanism that pretty much allows alex and peter thiel to basically remain in control of the business, which i think is a good thing. So no issues there beyond that.

There's two options grants that we are talking about here and i think a lot of the basically comments that i get in social media people, don't understand the difference and i'm going to explain in this video. So essentially, there was an options grant in 2009, 16 million options were granted to alex carp non-statutory options, and it's really important that you remember this name non-statutory options now. It's important trust me. That term is extremely important now, right now in august 2020, just before they went public and again it's important just before they went public.

He got another non-statutory option: grant of 141 million options and 40 million rsus, which is restricted stocks pretty much so essentially, that's stocks, not options. I know that sounds boring, but trust me it's going to make sense in just a second, so by the end of 2020, alex carp did not exercise a single option from that 60 million options he got granted in 2009. Why? Well? Because non-statutory options don't create a taxable event if the price of the share can't be determined upon the date of the grant, essentially, the only way in which it can be determined is if it's public. So if the company is not public, when you're getting non-statutory options as an employee, there is no taxable event upon the grant, because there is no determinable price.

Now it doesn't matter if the company becomes public later. The determining date is when you get these options and that's why they gave him the second package, the 141 million on august just before they went public, so he doesn't get taxed upon the grant, so 81 million shares and about 200 million options. That's what alex carp has and why is it important that both grants are non-statory, so i'm going to explain the actual technicalities later, but it's the first signal when you can see what alex carp cares about the thing with non-statutory options is that they get taxed at Ordinary income rates, not capital gains tax, like people think with most options. The reason is well.

You would say right. Why would you agree to this as an employee? Because if you agree to this as an employee, you pay double the tax. However, the company gets to the doctors as a business expense as salary, because if you use actual capital gains tax, then the company doesn't have the deduction and here's the thing if you're trying to safeguard the best interest of the company over yourself. That means non-statutory stock are better for the company worse for the employee, guess what alex carp chose to pay more tax to help out the company, give it more tax, deductible expenses? That's the first signal completely completely ignored by mainstream media and a lot of these social media influencers.

You have to understand that he gave up a lot of money to help the company. Now here's the thing since the one public he's been exercising heavily from that 60 million batch, because that 141 million batch starts vesting in august this year. So in three months, so he exercised about 33 million options from those 60 million that he actually has and he's been actually reporting on it, creating a lot of mess and a lot of fun. Now, here's the thing that most people don't understand these options expire in december this year, so he literally has six more months to wait and then the expired.

So we know alex carbs sold so far, 33 million shares, meaning he exercised at least 33 million. Now here's the thing every exercise like this causes him a massive tax event. The exercise cost him 20 dollars per share because his basis, his strike price, is 10 cents, as you can see in the documents. So, every time he exercises he has to pay tax on profit of twenty dollars per share, and at this point a lot of people have been asking me well tom.

If the exercise causes a taxable event, why doesn't he just wait until december? He still has time to exercise these for another six months. He can just wait. Why is he so eager to exercise now he wants to dump the shares he hates the company. He thinks the price is going down.

Quite the opposite. Another case of a positive signal. Being misinterpreted as a negative signal, let me show you if you think that the price is going up from now until december. You want to lock up the lower price and exercise today as fast as you can and not wait, because if you wait, if you assume the price will go up by december, then your price on the taxable income that you're going to be paying is going to Be much higher because you're not going to be paying 20 per share, taxable income you're going to be at 30 or 35, whatever it's going to be.

So if you assume the price of the shares will go up from today till december, you want to exercise now to lock up the lower price, so him exercising now shows you. He thinks that by the end of the year the share price will be higher. Otherwise he would have just waited if he thought that the share price will go down. There is no reason for him to exercise now.

That's another positive signal, completely misunderstood, and now, let's get to this argument, which i hear a lot and it's completely wrong. So now people are saying well tom. He now has enough cash that he doesn't need to exercise any more options until 2032, so he shouldn't right because he just paid 185 million dollars in debt to the irs and he exercised 450 million of sales. So that means he still have a lot of money - 265 million net enough money right.

He doesn't need to exercise more. He can just pay taxes up the wazoo wrong. Let me explain: let's do some math here. So, apart from the 60 million that expires in december, there's 141 million on the table, plus a 39 million rsus, which are essentially stock that he has to pay tax for now, here's the thing for the rsu's he's going to pay tax whenever they visit, so they Invested about two and a half percent per quarter, so that's going to be a tax bill.

That's going to be recurring over the next 10 years and it's not going to be cheap. So he needs to allocate that money by my calculation. It's going to be about 30 million dollars, maybe 32 million over the course of 10 years, so about 3 million per year. Now that's chump change versus what we are about to talk about right now.

The 141 million that he has in stock options will create a total tax liability of 450 million dollars, which is quite higher than the 260 million he currently has on cash, and that's just ignoring the fact that he might want to buy some expensive because he's a Billionaire now, let's just ignore that okay, so check this out. So what's going to happen, a lot of you may say well still tom, he has 265 million. Let's say he pays 30 for the rsu's. You still have 230.

He can just not exercise the 141 million options until 2032 until he has more cash. He doesn't need to do it now, but here's the cash if you've been following this video. You know what my answer is going to be. If he thinks that the share price is going to go up from august 2021 until 2032, he needs to exercise it as fast as he can to lock up the low price before it goes up.

So here's the conundrum, here's the paradox! If you don't see alex carp exercising as of august, which is the beginning of the vesting date of the new batch of options of that 141 million. If you don't see exercises as of august 2021, you should be worried because if he thinks the share price is going up, he's going to be exercising as fast as he can to lock up the royal price. Because if alex carp thinks that the share price will go up, he's going to be exercising as fast as he can triggering taxable abilities triggering sales to pay the tax bill. Now, if he's not doing that, you should be worried, and i know it sounds kind of counterintuitive, but it is true.

Quicker exercises means that you want to lock up the lower share price if he doesn't exercise we're and somehow i just managed to make a whole video about stock options. Taxation which i'm assuming there's gon na, be like 50 people who watch this. I don't know in any case, if you like this thing as much as i did, you know, let me know in the comments below if you hated it also. Let me know in the comments below much appreciation to our channel members and our patrons and the volunteer community.

Thank you guys. So much we'll see you guys in the next video.