Workplace Equity Compensation: Stock Options

By Michael Schneider on September 29, 2022

For our final post on Workplace Equity Compensation, we are going to discuss Company Stock Options. In our original post, I mentioned talking with a friend of mine who switched jobs and had received stock as part of a signing bonus. It turns out that he wasn’t given a direct stock grant but instead was given stock options, which come with their own set of rules.

What is an Employee Stock Option?

An Employee Stock Option is a contract that allows an employee to buy a specific number of shares of company stock at a specific grant or strike price. Options are generally tied to a vesting schedule as well, usually lasting for multiple years. As an example, if you receive options for 10,000 company shares and have a four-year vesting program, you will be able to only exercise 2,500 shares per year, starting in one year, if you want to exercise as soon as possible.  

How do I exercise my Options?

There are a few different ways to exercise your Employee Stock Options.

Option 1: If you are looking to cash out, you can initiate an ‘exercise and sell’ transaction where you do not need to put up the cash upfront to buy the shares. In this transaction, the broker will sell the shares immediately after you buy them.

Option 2: If you want to hold on to the shares, you will be responsible for using your own money to purchase the shares after you exercise the option. If you want to hold on to the stock but don’t want to put up any money, there is a happy medium. In this scenario, you will exercise your options and sell enough of them to cover the costs of exercising. For instance, let’s use an example where you have an option to buy 1000 shares of stock with a strike price of $20 and the stock is trading at $40. If you were to buy all of the shares, you would need to bring $20,000 to the table and then your stock would be worth $40,000. If you want to hold shares but do not have $20,000, you could do the full exercise and then partial sell of 500 shares. At $40 per share, those 500 shares would get you the $20,000 to buy all of the shares.

When should I exercise my Options?

This entirely depends on your current financial plan and where you think your company is headed. If you need extra income and the strike price is lower than the current stock price, you can net a quick gain by exercising the options. However, if you do not need the money right now and you believe your company will continue to grow, hanging on to the options, even at the end of the vesting cycle, may not be a bad idea.

This also depends on the type of company you are working at. If you are at a small company or start-up, you are likely looking for a longer-term holding period as the company value increases through funding rounds or going public. If you are at a more mature or publicly traded company, your holding period may be shorter if you do not see the company stock price moving drastically higher.

All in all, stock options are a form of compensation that can add a lot of incentive to work harder for your company and can also provide a tremendous amount of wealth generation in the right situation. If you have any stock options that you would like us to review, please feel free to reach out and set up an appointment.