STOCK OPTIONS: SEVEN THINGS YOU EVER WANTED TO KNOW

Do you work with a company that offers stock option as an incentive to help valuable employees work hard and produce results? A Stock-option is a contract made between an employer and an employee to buy a portion of the company stocks at an agreed price and time. So many organizations offer stock options as a better alternative to employee’s benefits. These options are confusing to employees receiving them because stock options have no real value until it is exercised.

Here are seven things you must know about the stock option

• Understand the math involved in Stock Option

The first thing to do before accepting this privilege is to thoroughly look at these options yourself and ensure that you understand the entire fraction. Understanding the whole fraction is the first step to evaluating the stocks. You must also take note of the denominator and the numerator in your option and never forget that the share value is the ultimate determinate of the entire option.

• Know if the stock-option is fair
Most firms offer varying stock options for employees in certain positions and salaries. Therefore, it is essential for you to know the range of your position as well as where you belong to. You must also endeavor to seek what is fair and right for your salary and position.
In some organization, the overall consensus for different positions include the following:

• C.E.O – Option-Grant of 4 to 8%
• V.P’s – Options ranging from 2 to 3%
• C.F.O – Options of 1to 3%
• Directors – Options of 1/2% or less

However, ensure that you go with what is fair with your position and salary. Don’t be forced to go for an option that is not befitting to your position or your salary level, instead properly carry out research and ensure that what is offered to you suits you appropriately.

• Stock options expire if unexercised
Stock options work with a time frame and they are usually offered to the employee at a particular price and on a specific date and time. They expire after a time frame of 10 years if unexercised. This implies that should the employee not exercise the privilege within a ten years window, they forfeit their right to buy such stock at that given price and may have to wait until he or she is offered another option at a new price by the employer. When granted, the offer is not usually vested. This implies that now the employee has no right to exercise the option immediately. For instance, a stock-option grant may vest one- fifth after the initial year and others over the subsequent three years by month. You can decide on how long you would want the option to be vested and while doing this, you must also keep in mind how long you would work as an employee of the company.

• Know the stock option price
Another important thing to take note of is the price of the option. These options are so designed by most firms that they will eventually be of no value on the day of the grant because they do not want to bring about a taxable-event before the Internal Revenue-Service. For example, if a firm grants its employee 2000 shares at $2.00 when the fair-market share was $5 – the IRS sees the difference of $6000 as a taxable income. Therefore, it is important to know the fair-market value held by your option as at the date of the grant. In the case of a public company employee, this is very much easy since pricing is most times dictated by the value of the closing price of your stock on a date in which the grant is offered.

• Know the key terms involved in the stock option

In stock option, some of the key terms to take note of is vesting of option which means you earn all rights to buy the option over a time frame. The price may be straightforward. However, what becomes confusing is how this price is usually determined. For instance, if the option says that you can get 2000 stocks priced at $2.00 within a vesting-period of four years, you must not buy them then, rather you can decide to buy 500 shares on annual basis for four years. You must endeavor to know the vesting’s schedule as well as how long you will be able to buy your vested options before going for the option available to you.

 

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