Stock options have become an attractive benefit - perhaps even a requirement - for many jobseekers. While you may be comfortable with their technical and administrative aspects, are you able to explain them to candidates and employees in a way that is meaningful to them?
Definitions
Stock options are the right to purchase a pre-determined number of shares of company stock. They are not stock grants or gifts. Think of them instead as "options to buy."
The grant price is the monetary value of the options. This is generally the market price on the day they are granted. In Initial Public Offering situations, however, the grant price may be determined "pre-IPO" and, therefore, not reflect actual market conditions.
The exercise price is the market value of the stock on the date the options are exercised.
To exercise options means, essentially, to purchase stock at the grant price, regardless of its market value at the time.
The vesting period is the schedule on which the options are earned. An organization might choose not to impose such restrictions or they may select one of the following types of schedules:
- Staggered schedule
An employee is limited to exercising X% of his or her options each year over a Y-year period. - Cliff schedule
An employee can exercise all of his or her options after a specified amount of time.
- Performance-based schedule
An employee can exercise his or her options if the company's stock price reaches a certain level.
The exercise period is the timeframe during which options must be exercised, or else they will be forfeited. In other words, "use 'em or lose 'em."
A lot requirement, if one exists, dictates that options must be exercised in groups of a certain size. For example, a lot size of 250 means that an employee can exercise 250, 500, or 750 options, but not 900.
Two Types of Stock Options
An organization may choose to offer:
- Incentive stock options; and/or
- Nonqualified stock options.
Incentive stock options are also known as "qualified" or "statutory," and nonqualified stock options as "nonstatutory." Throughout this article, however, they will be referred to as ISOs and NQSOs, respectively.
In general, ISOs are a bit more restrictive, but offer greater tax advantages than NQSOs. While this article will not attempt to explain the technicalities of each, their tax implications will be explored later.
Paying for Stock Options
