Stock options allow employees to purchase shares at a fixed price. Many companies, startups, or private companies often include these options in compensation packages for potential employees.
Stock options are not shares of stock. These options allow you to buy certain numbers of company shares at a fixed price. This is often called a grant, striking price, or exercise price. If the stock’s price rises, you could make money as your purchase price stays the same.
Stock options available for employees in different types
There are two types of stock options: non-qualified stock options and incentive stock choices (ISOs). They differ in how and when they are taxed. ISOs might be eligible for special tax treatment. Stock options are often offered by companies as part of their compensation package. This allows you to be part of the company’s success.
Many companies offer equity options that are not stock options. These options include restricted stock units (RSU) or restricted stock awards. These equity awards are not stock options and are subject to a different tax.
Stock option agreement
An offer letter might contain information about how many stock options a company offers. You will need to sign a stock option agreement (also called an option grant, stock options grant) if you want to purchase shares.
Stock option grants are available to grant stock options. This document usually contains information about:
- Types of stock options (ISOs & NSOs).
- You can purchase as many shares of stock as you wish
- Your strike price
- Your vesting schedule
Stock option agreements should include the expiration date. ISOs usually expire after 10 year. If you leave the company, your grant could also expire. There may be a short window in which you can exercise your options to purchase shares. If you do not exercise your options, you will lose the chance to purchase them.
Ask your company if you haven’t received a stock option agreement. It is possible that the board has not approved your options if you joined within the past month. If this is the case, you will be able receive the agreement shortly after the next board meeting.
If you wish to purchase or sell stock, it is important that you accept your stock option agreement. The agreement is voluntary and you don’t have to accept it. You can accept the agreement to allow yourself to exercise your rights in future.
How do stock options vest?
Vesting is the act of earning something over time. Companies can encourage employees to stay with them and help them succeed over many years by using vesting.
Vesting schedules
Vesting usually takes place according to a time-based plan that was set out in your stock option agreement. The vesting date should be listed in your option agreement. Many companies use a four year vesting period. This is often followed up by a one year “cliff” period.
Meetly offers options for a 4-year vesting period with a 1-year Cliff. Meetly’s vesting day begins on your first day of employment. As an award, Meetly will grant you 100 stock options. The vesting clock will start on your first day of employment. When you receive your first tranche is the anniversary of your first year. After that, you can purchase 25 shares. The vesting schedule will continue to apply for your remaining options.
You could accept the offer and work for Meetly for a month before purchasing stock in the company. You would then have to quit. You can’t do that with a cliff.
What happens after termination to stock options?
Once you leave the company, your options cease to vest. Options vested at the time of your departure may not be available for purchase. After termination, your option rights are not retained beyond a certain time. This is known as a post-termination exercise period (PTEP). In the past, many companies used either a 90-day PTEP or a three-month PTEP. Some companies offer PTEPs that are more generous. Carta is one example. As long as the company employs you, shares can be purchased.
It is crucial to keep this window open. You don’t need to be reminded by your company if you quit; most companies will only notify you through the option agreement you signed when joining.
You can make informed decisions about stock options and their functioning to help you make the best choices regarding when and how to exercise them.
Understanding stock options and their workings can help you make informed decisions about when and how to exercise them.