Stock Options Explained

Employee Stock Options
Many of us regularly hear about stock options but few understand what Stock options are. We’ll hear about employees we know who work for large companies talking about their options & how much they’re worth. Usually though, they are worth far less than they make out.

What a lot of employees don’t tell you is that they were given those options at a certain grant price or strike price; this is usually the price of the stock less a few percent at the time the options are granted to the employee.

So do all employees make money from stock options? Well, no, they don’t. Many do but this depends on how long they have held onto them for. Usually the ones that stay with the company the longest will have to most options which will have a lower strike price if the company has been performing well. Note: Employees do not need to know how the markets operate & they don’t need to know about stock trading to own stock options.

So why do companies give their employees stock options? I mean its money, right? Why would a company give more money to their employees than the standard wage? The reason is so that the employees stay with the company, the good ones anyway.

If you perform well in a company, then you more or less automatically receive more options than someone who does not perform as well. So, what we end up with is a lot of good employees staying with the company for a lot longer than they would normally stay for. Many employees plan their retirements on their stock option plan.

Another reason that employers offer an option plan is to not only keep their present work force but to attract new employees. It can sometimes be a great incentive for someone joining a company if they know that they will be getting a great stock option package from the company.

So what happens when you join a company that offers you stock options?. Firstly , it will be a while before you can sell them as the company will include a date in the future when the option can be sold, this is usually a couple of years down the road.

Generally they will offer you a few hundred shares which will have a certain strike price. So for example if your company offers you 100 options at $50 & a couple of years later these shares are worth $100, then you could exercise your 100 stock options for a profit of $5000. Of course this would be taxed but this depends on which country you exercise the options, some countries hardly tax options at all while others charge a higher tax. If you’re in the higher tax bracket you might be better off investing in some good stock analyzer software.

Some employees will sell only a small portion of their options from time to time as they become available, others will sell the entire options plan, once its vested & change them to normal stock. This might be a good idea if you must exercise your stock options by a certain date but would like to keep some shares in the company if its doing really well.

Many companies will space out their options sell dates so that all options aren’t vested on the same date, so usually a company will break it down over a six month period giving employees an opportunity to exercise their options twice a year if they want to.

In general, stock options are a great incentive to join a company but you should never base your financial future on them. Many employees that had planned to retire early lost most of their option when the markets crashed the last time around so it would be prudent to base you entire financial future on them. Look at them as a bonus & nothing more & you could get a nice surprise when you decide to leave the company.