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If life were Hollywood, I'd be typecast as The Guy Who Understands AMT As It Applies To Your Company's Stock Options. I get asked certain questions often enough that it's time to write up my answers. But remember, I'm not a tax lawyer or accountant; I just play one in movies. So get real tax advice from a professional.

Two questions are popular. First: "I just joined a company and got some stock options. There's something in the agreement about early-exercising. I understand how options work, but I don't understand why anyone would exercise early. What's the deal?" Second: "Oh boy, we're going public in six months, and the lockup expires 6 months after that! Should I exercise my options now to get the long-term capital gain rate on my zillions in profits?"

There are two considerations when you exercise ISOs (Incentive Stock Options): capital gains, and alternative minimum tax.

If you sell an asset more than a year after you acquired it, you're federally taxed on the profit at 15%. Less than that and it's the same as your ordinary income tax rate, which is probably 28%. So if you exercise your options, that means you buy the underlying stock, and that starts the cap gains period running, and you might cut your federal tax on the profits in half. Note that there are some funny rules for ISOs that effectively change this period for early-exercised stock to two years; either way, it's beneficial from the cap gains perspective to exercise as early as possible.

However, AMT can really screw you over. AMT is like an alternate universe that's even weirder than the normally taxed universe. You're potentially taxed on imaginary income, for example. In our case, the imaginary income is the difference between so-called fair market value of your stock on the day you exercise, and if that amount is large, you have to pay AMT on it, even if your stock ends up worthless by the time you're actually able to sell it.

Here's an example.

• On 1 Jan 2008 Joe gets 10,000 options of ABC Corp. at strike price of 5 cents.
• On 1 Jan 2010, ABC files for IPO for the coming month of June. The Board of Directors determines FMV of ABC is $75/share.
• On 2 Jan 2010, Joe is very excited about the upcoming IPO, so he exercises his options, writing a check for $500 (10,000 x 5 cents).
• On 1 Jun 2010, ABC goes public at $100. After an accounting scandal, the stock tanks. Joe ends up selling his shares for $1 each, or $10,000 total, the day the employee lockup expires. Joe's bummed out because he was briefly a millionaire, but still happy because he made a profit of $9,500.
• On 1 Apr 2011, Joe's accountant determines that Joe owes AMT. Joe "earned" imaginary income of $749,500 on 2 Jan 2010. The accountant asks Joe to write a check to the IRS for approximately $250,000.00 to pay his 2010 taxes. Joe says "wait a minute, why am I paying taxes of $250,000 on a profit of $9,500??" His accountant says "Because you suck."

Joe should have either exercised on 1/1/2008, or never early-exercised at all. Early exercise avoids AMT and starts the cap gains holding period. Never early-exercising means you pay higher taxes on the gains, but you avoid AMT (and, of course, you don't put any money at risk by exercising).

Obviously, things change if you assume the share price will go down. But you wouldn't be working at that company if you believed that.

Final disclaimer: all of this is probably wrong or at least out of date. For example, I heard from a friend that for 2007 you're allowed to recover quite a bit more than usual of AMT paid in prior years, so the situation is possibly not as awful as it has been in the past. Again, hire a professional.

The salad I just bought at the grocery store says it contains three servings. Yet it includes only one plastic fork. How rude!

A friend from college and I once went through a giggle session about how our moms would stick their right arms out to stop us from going through the car windshield whenever they braked hard. Now that it's illegal for kids to be in the front seat at all until they're 120 pounds or whatever the law is now, will evolution no longer favor families with strong Mom Reflexes?

I wish I could be involved in more "abandoned" projects like this:

U.S. Sen. Ted Stevens and Rep. Don Young, both Republicans, championed the project through Congress two years ago, securing more than $200 million for the bridge.... Under mounting political pressure over pork projects, Congress stripped the earmark -- or stipulation -- that the money be used for the airport, but still sent the money to the state for any use it deemed appropriate.

In other words, Congress writes a check to the State of Alaska for $200 million and writes "For Bridge To Nowhere" in the memo section. People scream "pork!!!" and Congress responds by crossing out the memo before dropping the check in the mail. Sigh.

"We should have stayed in Vietnam, too."

Apologies to those of you getting 404s on the blog archives. I've migrated to Movable Type 4 and all the old links changed. Give the search engines a few days to catch up and things should be findable again.

Update: Apologies for the lack of space between paragraphs, too. Seems to be a bug in MT4.

Second update: Fixed the MT4 bugs; paragraph spacing should be correct now. I'm writing a new entry about how to fix yours.

This has been driving me crazy for almost two years. On satellite radio back in 2005 I heard the song "Do You Wanna Funk" by Patrick Cowley & Sylvester. The song was familiar; I was certain I'd heard it in a movie soundtrack, but I absolutely could not place it. And the web was no help.

This morning I heard the song again, so I tried searching again, and this time found it. According to The Fabulous Sylvester: The Legend, the Music, the 70s in San Francisco by Joshua Gamson, as scanned and indexed by Google Book Search, the answer is... Trading Places. I think it's the scene where Billy Ray Valentine reacts to his newfound privilege and riches by throwing a party in his home.

Note that the book is copyrighted 2005, which means it might not have been in print yet when I first did my search. Thank you, Joshua Gamson! Thank you, Google Book Search!

Update: Trading Places, not Spaces! Aargh, my domesticity is showing!

I've been trying to wake up at 5:00 every morning. I have a couple early-morning commitments each week and it's been too painful to adjust my schedule just for those days, so I decided to try to standardize on the same time every morning. (Obligatory link on this topic.) Given my low success rate so far, I am not qualified to give advice, but that hasn't stopped me in the past, so here goes.

I have an alarm clock that lets me set two different alarms. I set one for 5:00 and the second for 5:01. I also have the clock on the other side of the room so I have to get up to shut it off. This means that I spend at least 60 seconds standing next to the alarm clock waiting for the second alarm to go off, and as long as I don't talk myself out of waking up and go right back to bed, then I stay up.

Last night, Mary and I were reminiscing about "go-getters," or more accurately, people we'd known in the past who weren't go-getters. By this I mean people who seemed to be waiting for good things to happen to them, rather than picking goals and working to achieve them.

Before descending too far into self-congratulation, I made a mental list of what I considered to be the important good decisions in my life. I was surprised when I realized that most of them weren't based on positive goals. They were simply decisions to escape bad situations.

To illustrate, here's a summary of my professional career since school:

"In spite of three invigorating years as a litigator at a prestigious Los Angeles entertainment law firm, I made the difficult decision to move to Silicon Valley and pursue a career in software engineering. Following a series of successful startups, in 2003 I took a position at Google, where I remain happily today."

Meanwhile, here's the same summary from a different perspective:

"Law made me miserable, so I quit. I left Los Angeles to escape an unhealthy personal relationship. I quit my job after the dot-com crash and a power struggle left marginal talent in charge of my company. I abandoned my own startup for reasons I still don't understand today."

The former sounds like the resume of a relentlessly driven go-getter. The latter is a litany of complaints, but more important, it's much closer to the truth.

Now, I'm old enough to know that I'm too young to be wise. But wisdom isn't suddenly conferred on your fiftieth birthday, either; it arrives slowly over time. It's ever so slightly possible there's some wisdom in what I'm about to say.

You might not be able to recognize good. You might never be sure you're about to make a good decision. But don't let that stop you from making the best decision you can, right now, to try to improve your life.

Why is this good advice? Why isn't this reckless?

Because even if you might not be able to recognize good, you can certainly recognize bad. To be precise, you can recognize when things are bad right now. And if you can recognize bad, then you can avoid it. You can recognize when it's time to roll the dice again and give yourself another chance. It won't always work; in fact, sometimes you'll jump from the frying pan into the fire. But nobody will ever fault you for constantly, relentlessly trying to avoid bad.

If you have ever dropped a set of flash cards on the floor and spent much-needed study time putting them back in approximate order, you'll appreciate this tip. Just draw a diagonal line along one side and use that as a cue to rearrange them next time.

"Let me put it to you this way: I earned capital in the campaign, political capital, and now I intend to spend it."

So many people misspell "sneak peek" these days that it's almost become proper English. Reminds me of "chaise lounge," a misspelling of the French term "chaise longue" meaning "long chair."*

Nonetheless, here I am on a rampage about it. For the last time: a "peak" is the top of a mountain, and a "peek" is a look. You take a peek at a peak.

Setting aside the issue of spelling, the term is so overused that it's meaningless. For example, if you are publishing a "sneak peek" on a blog, there's nothing sneaky about it anymore; everyone can see it because it's now available on the web.

* More on this phenomenon on Wikipedia. My favorite example is that "sweetheart" is a corruption of the original word "sweetard." Tonight I'll test-drive that term of endearment on my lovely sweetard wife Mary and see how my etymological defense holds up as she beats me to a pulp.

After Wednesday's unfortunate plane crash, people are expressing surprise that small airplanes are allowed to fly near large cities. Some are saying that the "terrorist threat" calls for new flight restrictions on small planes.

A couple thoughts:

• Suppose you're a terrorist. Which of the following sounds easier? Plan A: spend months in flight training, rent a Cessna with ten pounds of Semtex plastic explosives, then fly it into the 30th floor of a building and blow yourself up. Plan B: put the plastic explosives in a backpack, take an elevator to the 30th floor, and blow yourself up. No rational terrorist (yes, terrorists are entirely rational) would use a light aircraft for any malicious purpose, because a car or a backpack would serve the same purpose at lower cost and with less training.
• Clueless quote of the week: Governor George Pataki says "It's just unfathomable that five years after September 11th, an inexperienced pilot can be circling the city and not under the control of any of the radar towers of the airports around the city." Is he trying to say that radar tower control would keep a terrorist from crashing a plane into Manhattan? How would the exchange go? "Tower to terrorist, please divert from building." "Terrorist to tower, OK, sorry about that!"

This wasn't terrorism. A guy in a plane made a wrong turn and didn't see an obstacle. Just because a terrorist could do on purpose what someone did by accident doesn't mean we should ban that activity. It makes no sense to evoke terrorism in response to this accident.

Every so often I read organization tips on the web that seem ridiculously simple ("Keep a to do list." "Use Post-It notes."), but when I follow them, they turn out surprisingly useful. I won't claim that the following tip rises to that level, but it worked for me.

Over the past two weeks I sold two of my family's cars (a Honda Civic and a Honda Pilot) on Craigslist. This meant I got lots of calls from strangers all over the Bay Area. Many identified themselves by first name only, and in any event I didn't really care what their last names were.

For leads that sounded promising, I saved phone numbers in my cell phone using nicknames like "Pilot Lisa" or "Civic John." This is better than just "Lisa" for a couple reasons. When I get calls from Lisa and the caller ID pops up with the name, I know not just who it is, but why she's calling -- better than "who the heck is Lisa?" Plus, when the transaction is complete, I can run through all the "Pilot" and "Civic" names, which are sorted alphabetically in my address book, and delete them.

This is a nice way to manage temporary contacts related to a short-lived project.

Name other good movies (by "good" I mean "not Freaky Friday") that fit the "What happens when something weird happens to your brain?" theme.

• Memento
• Being John Malkovich
• Eternal Sunshine of the Spotless Mind

As reported in this Washington Post article, the government will finally stop collecting a certain telephone excise tax enacted in 1898 to fund the Spanish-American War. There's some controversy over the legitimacy of the tax, so in an unusual move the government is allowing taxpayers to request refunds of the taxes they paid since March 2003.

Something in the article caught my eye: an explanation why taxpayers have to go through their own phone bills to add up the taxes they paid, rather than having the phone companies automatically refund them:

It would be very costly for communications providers to comb their records and tell consumers how much tax they've paid, said Annabelle Canning, assistant general counsel at Verizon Wireless. Verizon has 53 million wireless customers and provides traditional phone service to 30 million households. "It would take tremendous resources," Canning said.

Oh, please. Which takes more resources: asking the phone company to write a small computer program that adds up taxes paid in its billing database, or asking 30 million individuals to do the same thing themselves? This is the same tactic used by rebate programs, which bank on customers forgetting to send in the rebate forms, or class action settlements, which almost always require class members to fill out intricate forms to claim their 75-cent settlement proceeds. If the value of the time required to claim something exceeds the value of the thing to be claimed, then rational people won't claim it.

Jeremy asks why banks won't help you figure out specifically when to transfer money so that it's sure to arrive on such-and-such a date. He compares FedEx and notes that they do a better job at solving this problem even though they're not in the business of moving money around. I don't know the answer for sure why this is, but I suspect it's for the same reason my online bill pay service makes me count backwards from the due dates on my bills in order to figure out the right date to send payment, rather than just letting me say "make sure my credit card gets paid $123.45 on April 16."

The reason is that banks don't want to be in this particular kind of insurance business. If you read the fine print of online banking agreements (likewise with wire transfer arrangements), you'll probably see lots of terms like "best efforts," "no warranty," and so on. They'll do their best to send the money on a certain date, but it's your problem if they don't, and it's especially your problem if it arrives later than you expected.

But FedEx is in exactly this kind of insurance business. For $13 or whatever it is they charge, they promise delivery on or before a certain date. If they fail, you get paid. If you want to get paid more when they fail (i.e., you're mailing a valuable item, or you just want to get paid more), then you can pay a higher delivery fee.

I don't know whether this answers Jeremy's question. In fact, my answer begs the question why banks aren't in this potentially lucrative business. I certainly don't know the answer to that, other than to cynically suggest that banks aren't willing to bet on their own reliability.

Bruce Schneier got it right. If you're OK with George Bush spying on Americans because the war on terror gives him the power to ignore the law and the U.S. Constitution, then you had better be especially OK with President Michael Moore spying on you, too. (President Michael Moore?!?! Sure, that sounds silly. But in 1950, would you have bet on Ronald Reagan for President? In 1985, would you have bet on Arnold Schwarzenegger for governor of California? How about Cher's husband in 1977 as a U.S. Congressman?)

The war on terror ain't ending. At least, I'm not planning on attending the victory party when they throw one, not unless security is REALLY tight. So when Michael Moore is President, the war on terror will still be in effect, and President Moore will cite President Bush as precedent for his continuing power to ignore the law, the Constitution, the Congress, and the U.S. Supreme Court, as long as he thinks he's making our country safer from our government's enemies.

This isn't about politics. It's not about whether you support President Bush. It's about whether you believe the law and the U.S. Constitution should apply to every American, including the American government.

California natives need a leap of faith to survive as pedestrians in New York. The first challenge we face is distance. People in Manhattan -- normal people just like you and me -- might walk a full mile to get from Point A to Point B, where neither Point A nor Point B is on a nature trail, or on a treadmill at the gym, or the spot in the mall where we forgot our car was parked. In fact, Point A might very well be home, and Point B might very well be work, and the A-to-B-to-A-again journey might happen every weekday. Yes, my fellow Californians, I've witnessed it myself: New Yorkers walk that far, on purpose.

The next challenge is accepting the change in personal space. In California, invisible bubbles surround us, extending eighteen inches in all directions. It's understood that we stay out of each other's bubbles; we've written screenplays about violations of our safe zones. But in New York, if it doesn't bruise you, then it's not too close. If you sit on a bench, someone might very well sit right next to you. On the subway, two or more people will grab the same handle to steady themselves, their hands possibly touching. On the sidewalk, even a slight hesitation in your gait could trigger multi-person collisions; that's how closely and precisely New Yorkers navigate through crowds of themselves. If you're going to be visiting Manhattan for the first time, you can simulate the experience before your trip begins: just go to your nearest shopping mall and spend six hours walking the wrong way on the escalators.

The final challenge is understanding the balance of power between cars and pedestrians. In California, cars win. In fact, they win with a vengeance. They're speeding metal blocks of death that won't slow down even after they mow down you and your family. This is actually codified in the California Vehicle Code:

21949. (a) The Legislature hereby finds and declares that it is the policy of the State of California that vehicle travel shall supersede pedestrian travel, whether by foot, wheelchair, walker, or stroller. The Legislature hereby further finds and declares that any such vehicle shall divert, impede, pummel, squash, or splay pedestrians as necessary for said vehicle to reach said vehicle's destination with comfort and convenience.

OK, maybe that last part is an exaggeration. But truthfully, it's no surprise that California pedestrians follow the rules: we wait when we see the red hand, we go when the little person appears, and we quicken our pace when he turns back into the blinking red hand. Jaywalking has been reported in our great state, but only in hit-and-run newspaper articles where the subtext screams loud and clear that it was the pedestrian's fault for veering out of the crosswalk. This is why we always drive rather than walk in California. It's no fun playing on the losing side of a game.

In New York, it's no contest: pedestrians win. The red hand ranks second-to-last in the Signs That We Respect category, barely ahead of mattress tags. Here are the rules, as far as I can tell:

• Walk symbol: Walk. Feel free to kick or slap any vehicle within reaching distance.
• Blinking don't-walk symbol (with green light): Walk. Begin crossing the street if needed.
• Blinking don't-walk symbol (with yellow light): Keep walking. Pick up the pace if you're still half a block or more away from the crosswalk and intend to make the light.
• Don't walk symbol (with fresh opposing green light): Run. Increase speed if cars honk.
• Don't walk symbol (with stale opposing green light): This is soon to become a walk symbol, so go ahead and walk now. Look or listen briefly for oncoming traffic unless everyone around you is already walking.

Note: I mentioned that cars honk their horns. This happens a lot in Manhattan. I recommend wearing an iPod. Most New York pedestrians wear iPods to eliminate the annoying sound of drivers attempting to warn them of approaching danger.

If you do survive your stay in New York, you'll have a new respect for the power of walking. You'll have visions of waking up half an hour early everyday and strolling to the coffee shop down the street. You'll think about investing in a new pair of walking shoes. Then you'll remember that the coffee shop is two exits down the freeway, and that California doesn't have any sidewalks. But you can still buy the new shoes.

link

I came across the following ominous search term in my webserver logs:

michael tsao death

Curious about what the world had to say about such an idea, I typed the same search term into Google and was saddened to see that indeed, Michael Tsao had died.

Long ago, back in the days when you could email people you found on the web and they'd actually reply, I wrote to the president of Kahiki Foods. I proudly announced that I, too, was a Michael Tsao, and told him a bit about myself. He promptly wrote back, saying that his son was also in the tech industry, and that he wished me well.

That was the extent of my relationship with this Michael Tsao. But even from my brief contact with him, I know he was a decent guy, and I'm sorry that he's gone.

In my mind, Amazon has succeeded in doing something that no other merchant has: it has created a currency that's as valuable as cash. I buy enough stuff on Amazon that I know I'll eventually consume any Amazon gift certificate I receive, and thanks to their generally reasonable prices, Super Saver shipping, and lack of California sales tax, I don't feel that I'm paying any penalty for buying something from them instead of locally.

In other words, I'd pay $50 for a $50 Amazon gift certificate. But not everyone shares my view.

In Gonzales v. Raich, six Supreme Court justices acted against the express will of the people in eight states.* Will Bill Frist now include those justices in his rants against "activist judges"?

*Of the ten states with laws permitting use of medical marijuana, eight enacted their laws as the result of direct popular election.

Yesterday on the XM Radio station Chrome I heard the long version of Gloria Gaynor's disco anthem I Will Survive for the first time. It's quite impressive. The version you're probably used to hearing is about three minutes long. But the long version is basically her singing the whole song all over again. Toward the end the drummer starts doing some really funky improvisations, like he's had an itch for a while and needs to scratch without missing any beats.

AT&T Wireless customers, one of whom is me, were switched over to Cingular a few months ago following the merger. My new carrier has a trick to either get people to pay their bills earlier, or charge them hard-to-dispute penalties for unintentionally paying a few days late.

Nowhere on the bill does it give a date when the bill is due. Instead, in the "Date Due" field it says "UPON RECEIPT." In the itemized portion of the bill it says a "late fee may be applied for amounts unpaid 22 days after the date the invoice was mailed." But there's no indication when the invoice was mailed. There is no postmark. There is a "Date of Invoice," but that could be before or after the mailing date -- indeed, on my latest bill the itemized charges stopped three days before the date of invoice, so they could very well have mailed it with a post-dated invoice.

Since it's impossible to tell with certainty when this 22-day period begins or ends, most people will simply pay the bill right away rather than risk being late. And if they are charged a late fee, it'll be hard to determine whether it was justified.

Evil, inconvenient, and lame.

I hear some readers saying that the due date is "right away," and that I have no right to demand a grace period. The most concise answer I can come up with to that position is "WRONG." A slightly less pithy response is that this is a contract, and both parties should be able to know the exact terms of the contract.

I think the U.S. drug industry is betting that the government will never allow Americans to import Canadian drugs.

I base this belief on a simple application of game theory. There are two possible cases: either the government will never allow imports, or it eventually will.

Start with the first case. If the government does not allow imports, then U.S. drug companies will continue to have a collective monopoly on the U.S. drug market and can continue to keep prices higher than import prices. Same as always.

But consider the second case. If the government eventually does allow imports, then U.S. drug companies will have to compete with import drugs, and thus will have to quickly reduce their prices in order to be competitive.

The second case would be a terrible situation for U.S. drug companies. If the drug companies honestly believed it might happen, then they'd do everything they could to prevent it. One effective way would be to reduce drug prices now, ostensibly to placate Americans, but really to quell the movement toward allowing imports. This would allow them to choose the lesser of two evils: having to charge lower prices for drugs but maintaining a collective monopoly, or having to charge lower prices because they're competing with imported drugs.

If this reasoning is correct, then the drug companies are predicting importation won't happen. Otherwise they'd begin lowering their prices now. Indeed, given the outcome of the presidential election, it seems that the prediction was correct.