Yes, I agree with you that terms like salary, benefits, vacation allowance, are all terms we know and understand when it comes to employment.
But terms like equity, stock options? Particularly the terms that surround employee stock options (ESO) can feel like a foreign language.
Stocks versus Stock options:
Stock is created when a company decides to sell a piece of itself to investors to raise money. Each of those pieces is called a share, and each of those investors is called a shareholder or stockholder.
A stock option is based on a stock and can’t exist without it. A stock, on the other hand, exists regardless of whether there are any options derived from it.
Stock options are part of the underlying stock. If the stock price goes up or down, the stock options follow that.
Once the stock option reaches its time limit, the option holder can decide to buy or sell the number of shares associated with the option, sell the option itself, or let the option expire.
In a nutshell, the main difference between a stock and option is like the difference between a thing and its shadow. One is an existing entity and the other is something created by the entity.
Please don’t confuse this with the other giant topic called Options Trading. I will discuss options trading in a separate blog some other day, today it’s all about Employee Stock Options.
Have you heard the phrase “Don’t put all your eggs in one basket?”
Buying too many stock options in the same company could over-allocate the stock option owner to one company’s stock. If the company suffers a financial decline and their stock prices drop, an owner could lose a large sum of their net worth.
Today, many private companies offer some sort of stock option package as part of their compensation.
Stock option owners need to be aware of how to exercise their options so that they make money and don’t risk losing it and that they don’t suffer any negative consequences of taxes.
Employee stock option is when companies sometimes offer their employees stock options as an incentive. Employees can purchase a set number of shares at a certain price for a specified period.
Equity or stock options give an employee the ability to buy shares of the company they work for at a certain price within a certain timeframe.
There are two common forms of stock options that you might receive as part of a compensation package, these are incentive stock options and non-qualified stock options and the key difference between them are the tax rules that apply to each option.
If you are unsure what kind of option you hold or that you are being offered, then speak to your employer.
Incentive stock options (ISO) ISOs have a strike price, which is the price a holder must pay to purchase one share of the stock. Strike price is known as the exercise price, is the predetermined price for which you can buy stock from your employer.
Non-qualified stock options (NSO) give you the right to buy a set number of shares at a predetermined price, which is typically the market rate at the date those shares are issued and which will have a deadline.
Your stock option plan should contain a document that explains exactly what kind of options you have and the regulations that apply to them
Restricted stock units (RSU): With RSUs, employees are effectively awarded one share, which gets taxed as ordinary income when the RSU vests, which means that employees are awarded stocks rather than paying for them.
What is Vesting means?
This is the process of gaining full legal rights to your stock. You will initially receive your options unvested, your company would like you to have options, but only if you keep working there for a while.
Three important dates to know:
Grant date is the date on which your employer grants you the option to buy a set number of shares.
Exercise date is the day that you decided to exercise your options or buy your shares.
Expiration date is the date at which your offering period ends and your option to buy stock expires.
That’s all for today friends! Hope it helps! With that I come to a conclusion of this blog which is part one on stocks. Thank you for reading! Come back every day to my website to check important topics and interesting articles.