When your new employer or the person who is recruiting you offers you stock options, it sounds like a dream come true. You’re going to be the proud owner of stocks in this company. It’s not outside the boundaries of imagination that you could become very wealthy, or at least recognize a tidy profit by accepting the stock option.
Really, what’s it all about? What should you be considering when they offer you stock as part of the deal? When the company for which you will be working offers you stock options, it allows you –in a way—to share in the growth that takes place in the company. This, is a very positive way to begin a new job. Why? It aligns your interest with that of the company, and when that company is publicly traded, the offer aligns your interest with the shareholders. Generally I believe the offer of options means the company is interested in trying to retain you as an employee, and is offering an incentive to help you profit as the company grows. Also – we have all heard the stories – it is a potentially very lucrative scenario for an employee
According to the experts, when a company offers you stock options, it makes it very clear that the company in question is concerned with keeping you for a long time period and making sure that you’re happy with the position.
In most cases, a stock option is just what it says. No one is giving you stock. You are going to get the option to buy it and probably to buy it at a rate that is fixed and much lower than the stock may sell for when you are given the go-ahead to buy it. ESO or Employee stock options are the most commonly offered incentives to an employee or a prospective employee.
Depending on what kind of option you’ve got, it can be fairly complex. In many cases you’re not able to begin the purchase at all for at least a year.
One example of this is that you’ve been offered a thousand shares of stock by your company. It’s a company that is still privately owned and the day that you are hired, that’s the price you’re going to pay. For example, if you’re hired today, but you have a five year wait with a one year cliff, that means that you’re not allowed to have any of your stock for a year. At the end of the year you can have one 5th of that stock, the second year allows you 20 percent more and so on until you achieve the full 100 percent at the end of the fifth year.
Now, you get the strike price of a dollar but you can’t own it all for five years. In the interim, the stock rises in price approximately 20 dollars per share. You still get to have the stock at a one dollar price, but you do have to buy it. You will cut a check for the total cost of your stock as you buy. Exercise the 20 percent at the end of the first year, if you are entitled to 100 shares, then you have to pay 100 dollars for the stock and then do it again the second year.
Keep in mind that you still don’t technically own anything worth a great deal of money. What you’ve got is a promise and that’s about it.
When you exercise your options and buy the stock for $1, you get a share certificate that says ‘Congrats, you have a share certificate that’s worth, in today’s price, $5 per share.’ In reality you don’t get cash, because the company is still private. You’re holding a piece of the company you hope will get acquired or issue a dividend, or have an IPO. Until then all you have is the sheet of paper.
Stock options may be a very good way to get invested in the company or they may in some circumstances be more trouble than help. Employee equity takes different forms, has different tax treatments, and may affect your portfolio in different ways.
Don’t get me wrong, be excited! Chances are this is going to be one of your career highs but always seek professional advice from a financial planner when stock options are a part of the package.
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About the author
Bruce Wright is the founder and Managing Director of Pathfinder Executive Search Ltd and has over 14 years Recruiting, Staffing and Executive Search experience. Over 12 years of this has been spent in Executive Search. He has been helping top Enterprise Software companies find senior level executives and helping build world class teams across Europe and North America since 2003. Unlike many Executive Search Professionals who claim to work across borders, he really has placed Senior Professionals with Enterprise Software companies in France, Germany, Spain, Sweden, Switzerland, The Netherlands, UK and North America. Often working across borders simultaneously for the same client – this generates a synergy that makes for truly outstanding results. He is also a committed endurance athlete who has competed in challenges around the world, including the infamous Marathon des Sables, Zurich Ironman and the magical Ultra Trail du Mont Blanc. In addition to UTMB he has twice run 100 miles non-stop.