Equity: a guiding framework

Exercising options is useless if the employee can buy shares of the company stock for less on the open market.

Stock Options 101: The Essentials

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. 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 increase 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 beyond the paycheck. By , so many options were underwater that they lost some of their appeal among the corporate masses.


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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. 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.

Dividing Employee Stock Options Upon Divorce - Madigan & Lewis LLP

On the other hand, you may risk waiting too long and miss the peak, or else exercise too early and miss more growth. 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 Theory

The information contained in this article is not legal advice and is not a substitute for such advice. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. However, based on expected rates of return, this calculator can help you determine the potential value of your options at expiration.

The tax treatment of employee stock options depends on whether they're classified as non-qualified stock options NSOs or incentive stock options ISOs. With both types of options, the grant of the options is not a taxable event. The major difference is that with non-qualified stock options, taxation of the "bargain element" -- that is, the difference between the stock's market price and the exercise price -- begins at the time of exercise. Any further gain can be taxed when the shares are eventually sold. On the other hand, with incentive stock options, taxation doesn't occur until the shares are sold.

In either case, if the shares are held for less than 12 months, any gain is considered a short-term gain and is taxable as ordinary income, while shares held for longer than 12 months are taxable at more favorable long-term capital gains rates. Investing Best Accounts.

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