Stock options are a great incentive that many companies use to attract and retain employees. The purpose of the stock option packages offered is to entice the employee to their business and tie their performance to the outcome of the stock value.
Employees from front-line workers to executive C-suite positions can influence the value of a stock. When employees work together to increase the service offered by the company, it will also increase the value of the stock. Employee stock option packages help align the employees of a company with the goals of that company.
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Many factors influence stock value in a company, but if all employees have a vested interest in offering the best of their abilities at work, a stock option package can prove a valuable incentive for those who participate in it.
For example, Brooke Harley, a former employee of Lululemon, had negotiated to receive 20,000 options with a strike price of about $10 a share. Brooke says she amassed roughly $1.5 million from her options within five years when the shares were worth approximately $80 each. That’s a nice bonus for her contribution to the company while she worked there.
The problem is that many women have stock options as part of their employment packages and don’t understand what that means. If you don’t understand your employee stock option plan and how you can use it to your advantage, you are leaving money on the table.
The main points for understanding an employee stock option package:
1. Vesting period
A vesting period is when an employer grants you options, you may not receive all options at once. They may spread out the amount of stock you may receive per year over a few years. The purpose is it is in your employer’s best interest to keep you on the team for as long as possible, and vesting allows for this.
For example, you may be granted 20,000 stock options when you receive a job offer but may only be permitted to exercise 5,000 of those stocks each year over four years.
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2. Exercising stock options
When you exercise stock options, you are allowed to purchase them by the terms set out in the contract when you started your job. If there was a promise of being allowed to buy your 20,000 stock options at $5 each, which is known as the strike price, but now they are trading publicly for $50 each, you may still purchase them at the $5 strike price per your contract.
If the stock is traded publicly at less than $5 per stock, it will not be a good investment to exercise your option at $5.
Once you have exercised your option, you own your stock and may sell them at any point in time.
3. Stock options and taxes
There will be taxes that need to be paid when you exercise your option and sell your stock. There are two types of stock options: non-qualified stock options, the most common, and incentive stock options. Each type is taxed differently.
The bottom line is that understanding the financial implications of your employee stock option packages is financially empowering. Taking the time to understand how your employee stock option plan works can prove to be an excellent windfall of cash.
Employee stock option packages can be an excellent addition to your incentive package. The goal of company stock is to appreciate over time, and if you can purchase your stock at a lower price and sell them at a higher price, that is a large amount of money for you to cash in.
