Present a stock option. The Downside Risk
What You Need to Know About Stock Options
Melissa Phipps Updated November 12, If you work in an in-demand industry, have a rare skill, or simply get lucky at the right company, you might land a job offering stock options. When considering or comparing a compensation package with stock option benefits, understand exactly how stock options work and what they might be worth.
Employee Stock Options Explained
What Is a Stock Option? A stock option gives an employee the ability to buy shares of company stock at a certain price, within a certain period of time.
Purchasing the stock shares at the grant price is known as exercising your options.
Equity 101 Part 1: Startup employee stock options
How do employees come up with the cash to exercise the options and buy the stock? You can use savings, rollover proceeds from another stock sale, or borrow from a brokerage account and pay it back immediately. Timing is important, however. If the stock price is trading lower than the grant price, the options are said to be underwater. Exercising options is useless if the employee can buy shares of the company stock for less on the open market.
Most employees get NSOs, which are priced at a discount and taxed at ordinary income tax rates. A tax hit occurs once the options are exercised, so you pay either income tax or capital gains tax depending on whether your option is qualified, based on the grant price.
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Once you exercise the options, you can sell the shares after a short waiting period, or hold onto the shares and wait for the stock to present a stock option further before selling. Some investors hedge their bets by doing a bit of each.
Once reserved only for the executive team, stock options became a popular form of compensation during the tech boom in the late s. Back then, there were many tales of stock option success, and certain types of employees were looking for a sense of ownership in their workplace that went present a stock option the paycheck.
Stock Options 101: The Essentials
Byso many options were underwater that they lost some of their appeal among the corporate masses. But in the world of start-ups, enough people got very wealthy from stock options that they remain a great tool for attracting early-stage talent.
There are a variety of reasons employers want to offer stock options.
Vesting programs can help build longer-term loyalty among employees. The sense of shared ownership can foster a strong corporate culture.
Employee Stock Option (ESO)
Employees literally help to grow the company not just as staff, but as shareholders. For employees, stock options can result in tremendous wealth, particularly if you join the company at an early or growing stage. On the flip side, those are the companies that are also likely to go under with only worthless stock options left behind. Stock options have expiration dates and will be worthless if held too long. But deciding when to exercise before the options expire can be difficult as well.
One camp says hold out as long as you can, waiting for the pinnacle price. On the other hand, you may risk waiting too long and miss the peak, or else exercise too early and miss more growth.
The Benefits and Value of Stock Options
There is no right answer. The circumstances will depend on your company, the market, or any number of things that you may not be able to predict.
All else being equal, stock options are generally a great perk. If you accept a job with stock options, it is helpful to ask the human resources representative if there is any guidance or advice to help sort out stock options for employees.
The information contained in this article is not legal advice and is not a substitute for such advice. Article Table of Contents Skip to section Expand.
- Employee stock options ESOs are a type of equity compensation granted by companies to their employees and executives.
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- Because your purchase price stays the same, if the value of the stock goes up, you could make money on the difference.
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- Objectives[ edit ] Many companies use employee stock options plans to retain, reward, and attract employees,  the objective being to give employees an incentive to behave in ways that will boost the company's stock price.
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