Employer stock options are options that employers offer to their employees as benefits for working for a certain number of years at the business. Stock options should not be confused with real stock. Employees do not actually receive shares in the company with a stock option plan, only the ability to purchase stock at a set date and a set price. The assumption is that employees will exercise these options, tying the success of the company to their returns on investment, increasing performance and providing the company with additional funding.
Vesting
Stock options typically have a vestment period, often several years, in which employees receive the options but not the ability to exercise them until the vesting period is over. This helps to prevent employees from cashing in on the options and then immediately leaving for a different job.
Companies arrange vesting periods differently depending on the benefit structure. Sometimes options may be immediately exercisable, but not awarded until the employee has worked for the company for a certain number of years.
Value
The value of the stock options depends largely on the market. When options are created, they are created at a set price employees must pay to buy the shares. This price may be associated with a discount, but employees can gain even more value by sitting on their options. As long as company stock continues to rise in market value, employees can realize more profit by waiting to exercise the option and buying at what could become an increasingly lower price compared to the current price.
Taxes
There are two different types of stock options employers offer: unqualified and qualified. Unqualified stock options tend to be the most flexible. They come more often with discounts, and employees can give them to dependents or charities if employers allow it. Qualified plans do not have such flexibility, but they come with a key advantage: They are usually taxed with the capital gains rate, a lower rate than the income tax rate that is incurred when employees make profit with unqualified stock options. Many companies have each type of stock option for different sets of employees.
Considerations
Employer stock options are subject to a number of additional rules that can vary from state to state or company to company. Employees should carefully investigate the benefit plans to choose the best option. Stock options can actually result in a loss if the company's stock value is falling. Employees who choose to pay for stock options through loans may struggle if they do not realize immediate profit. Companies also retain the ability to reverse certain stock options if the business is struggling.
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