Understanding Your Employee Stock Option Grant
- Strike Price. The strike price is the price at which the options can be exercised (or purchased – turning them from...
- Vesting Period. The entire reason that startups (and other companies) give employees stock options is as an incentive to...
- NSO/ISO. The last thing to find out is if your options are NSO or ISO. The main...
What are stock grants and how do they work?
Stock grants may be awarded to an employee by a company with the hope that the shared benefit of increasing stock value will translate into a strong work ethic to continue to grow the company.
Should I accept my stock grant?
But accepting your stock grant is one of the most important tasks to take care of when starting at a company. Yet many people make the mistake of forgetting about it, or worse, ignoring it. Here’s why accepting your stock grant is a no-brainer.
What is the net worth of stock grants?
A stock grant's net worth is stable and won't go to zero until the company goes out of business. In order to balance the reward-and-risk profile of a compensation package, some options may be awarded in addition to stock. The worth of the shares that are given as a stock grant get taxed as regular compensation.
What questions should I ask my employer about my stock grants?
By asking a few simple questions, you can better understand your stock grants and therefore begin making better decisions about how to best use them. Here are 4 questions to ask your employer regarding your stock grants. Question 1 – What Employee Stock Grants Did You Actually Receive?
How does a stock grant work?
A stock grant is also known as an employee grant. An example of this would be a company granting a new employee 50 shares of shock that are vested over a period of two years. This entails that the employee is going to gain this stock only once these two years of working at the company are completed.
What does it mean to be granted stock?
From the employee's standpoint, a stock option grant is an opportunity to purchase stock in the company for which they work. Typically, the grant price is set as the market price at the time the grant is offered.
How do you evaluate a stock option grant?
10 Tips About Stock Option Agreements When Evaluating a Job OfferExactly what is a stock option? ... How many shares will my option allow me to purchase? ... What's the exercise price of my initial options? ... What is the company's total capitalization? ... How many other options will be authorized?More items...
How do I cash in stock grants?
Contact your company's plan administrator and indicate you'd like to cash out your stock. For a privately held company, the company must buy back your stock for a price set by an outside auditor. Complete the required paperwork and wait for your check.
Should I accept a stock option grant?
It may sound complicated, but accepting your stock grant should be a no-brainer for anyone who's starting at a new company. It's low-risk and can provide measurable benefits down the road. To get started on the ins and outs of stock options, check out part 1 of our series Equity 101: Startup Employee Stock Options.
Do stock grants count as income?
If you're granted a restricted stock award, you have two choices: you can pay ordinary income tax on the award when it's granted and pay long-term capital gains taxes on the gain when you sell, or you can pay ordinary income tax on the whole amount when it vests.
What is a good stock option price?
For a very early-stage company that has only done a seed round, I would use 125 percent. For a company that has done its Series A and has good momentum, use 100 percent. After Series B, use 80 percent. For later rounds when a company is doing well, 60 percent.
Should I take stock options or higher salary?
The better strategy with stock options Stock options are an excellent benefit — if there is no cost to the employee in the form of reduced salary or benefits. In that situation, the employee will win if the stock price rises above the exercise price once the options are vested.
How do stock options work example?
Call example The current price of the stock is $30. If the price of the stock shoots up to $55 on the day of expiration, Jon can exercise his option to buy 100 shares of CSX at $45 and then sell them at $55 on the day of expiration, making a profit of $10 per share.
When should you sell stock grants?
If you're granted RSUs, you get to essentially own company shares without putting any money down (unlike when you are exercising stock options). So, when is the best time to sell your RSUs? If your company is public, the best thing to do is to cash them out as soon as they vest.
Can you sell a stock grant?
Selling your stock You'll likely have to pay taxes again if you sell stock you received through an RSU or a stock grant. After you pay the income tax on the fair value of your stock, the IRS taxes you the same as if you bought the stock on the open market.
What does grant price mean?
The grant price (also commonly referred to as the exercise price) is the amount you pay to the company for each share. This price is set by the company at the time the stock option grant is made (grant date).
Strike Price
The strike price is the price at which the options can be exercised (or purchased – turning them from options into actual shares). This price is important because it gives you an idea of your total cost when exercising options in the future.
Vesting Period
The entire reason that startups (and other companies) give employees stock options is as an incentive to motivate and retain them. This is where the vesting mechanism comes in. Your options typically will vest over time, meaning the longer you are with your company the more vested options you will have.
What is the basis of a stock if you didn't pay anything?
In other words, if you didn’t pay anything for the stock, your basis is zero. After the stock vests, your basis includes the amount you reported as income when the stock vested (in addition to the amount you paid for the stock, if any). Example: You received a grant of restricted stock and didn’t make the section 83b election.
What is the basis of a stock?
Basis of the stock. Your basis in the stock is equal to the amount you paid for it, if any, plus the amount of income you reported in connection with the stock grant. Generally the sum of these numbers is the fair market value of the stock. Your basis doesn’t include the tax withholding, even if you had to pay that amount out ...
What happens if you don't sell stock?
Receiving vested stock. If your stock is vested when you receive it, you have to report compensation income equal to the value of the stock on the date of the grant or award. That’s true even if you don’t sell the stock, so you haven’t received any cash. Example: Your employer awards you 250 shares of stock worth $40 each.
What is compensation income when stock vests?
Income when stock vests. When the stock vests, you’re required to report compensation income equal to the fair market value of the stock. The fair market value is determined as of the time the stock vests. Example: You receive 1,000 shares of stock at a time when the value of one share is $20.00.
What happens if you wait for stock to vest?
During the period you’re waiting for your stock to vest, any increase in the value of the stock is going to result in ordinary compensation income, not capital gain.
How long do you have to file a stock election?
If you think you would be better off under the rules for vested stock, you can elect to use those rules, but you have to file the election within 30 days after receiving the stock. You may have ownership rights for the stock even though the tax law doesn’t treat you as an owner.
How much capital gain would you report if you sold a stock for $28,000?
Your basis is the stock is $27,000, so you would report only $1,000 of gain if you sold it for $28,000. For tax purposes your holding period for the stock begins when it becomes vested. You need to hold the stock at least a year and a day after the vesting date to qualify for a long-term capital gain when you sell it.
What is stock grant agreement?
A stock grant agreement is a form your company uses to grant you an equity award. Grant agreements can be in the form of printed certificates or letters or online documents. For details about grant provisions and how to find examples, see a related FAQ.
Do grant agreements have standard provisions?
Although grant agreements have standard provisions for all participants, the size of grants and the specific terms can differ among individuals at a company (see a related FAQ on what provisions are negotiable). They also contain terms that are specific to you, such as noncompete provisions.
Why do companies give stock grants?
Some companies offer employee stock grants as part of a compensation package to help attract , retain, and reward key employees. Both the business and the employee share the hope that the stock price of the company will increase over time, which in turn can increase the success of the business and increase the wealth of the employee. ...
What should a plan to sell stock grants be balanced with?
A plan to sell some or all of your stock grants should be balanced with your other assets, your goals, and your objectives. A good plan will start early and be reevaluated often in light of changing finances and changing market prices.
What does vesting mean for stock grants?
Vesting is the time between when you receive stock grants and when you can actually do something with said grants. Prior to your stock grants vesting, they only remain a future promise to you; a promise that you cannot currently act on.
Why do employers have incentive to make future promises?
Your employer has a big incentive to make that future promise, because they can use it to reward you for the company doing well — but also to keep the golden handcuffs on you. Here’s what I mean: let’s assume that you have 10,000 restricted stock units that vest in 3 years.
Why is it important to take personal responsibility for stock grants?
As an employee on the receiving end of stock grants, it’s important to take personal responsibility to understand how they fit into your financial plan. Because even though the company helps by giving you the stock grants, it is incumbent upon you to make the best of them. Stock grants as compensation can be complicated.
What are the acronyms for stock grants?
Not only that, but you often need to learn the corresponding acronyms: ISO, NSO or NQSO, RSU, and ESPP. These names and acronyms are often used interchangeably in the course of casual conversation. However, each specific stock grant has it owns distinct advantages and disadvantages.
When are NSOs taxed?
Non-Qualified Stock Options – Generally speaking, NSOs are taxed when you exercise the shares, not when they vest. This ability to exercise when you want gives you some control over when you have to handle the pending tax impact. Incentive Stock Options – You are usually taxed when you exercise the incentive stock option.
1. What are the vesting terms and when does the vesting begin?
Vesting allows employees to earn equity over time as incentive form them to stay with the company. The vesting schedule may be detailed in the offer letter, but if it is not you should ask for it.
3. What is the price per share of your options?
The Board is required to grant stock options at the current fair market value of the stock. This is normally done by relying on an expert report called a 409A valuation report that is good for a year unless there is a material event (i.e. another round of funding).
4. When is the next board meeting and does the company expect the current 409A valuation report to be valid at that meeting?
Stock options are not valid until the board of directors approves the grant. If the 409A is about to “become stale” this can lead to a long delay in the formal option grant (I’ve seen delays of almost a year) and if the company is doing well, the fair market value of the stock can increase rather dramatically.
What is stock option?
Though a stock option is not the same as being given shares outright, it gives you the option to purchase shares of common stock at an agreed-upon price. If the stock value increases, you could make significant financial gains—but only if you’ve exercised (purchased) your options.
Is it a no-brainer to accept a stock grant?
It may sound complicated, but accepting your stock grant should be a no-brainer for anyone who’s starting at a new company. It’s low-risk and can provide measurable benefits down the road.
What is stock grant vs stock options?
Stock grants vs. stock options are different tools employers use to motivate and reward their employees. A corporation can get a tax deduction for letting employees become owners of a company when they follow the rules for letting them purchase stock or grant shares. In either case, employees get taxed on the stock value that's received.
What are the advantages of stock grants?
An advantage of these is the options and stock grants will cost the company more when there's a high stock price, but will cost the company less when the stock is low.
Why is it important to manage stock?
It's essential to manage stock as part of an investment strategy, whether they're granted stock or options. These should be handled carefully. Grants and stock options should motivate employees to work harder, stay at work later, and assist with the appreciation of the company's stock. It's beneficial to the employee since the higher value the shares have, the more the employee will gain out of them. These two forms of compensation will also discourage employees from quitting their jobs until the options or stocks vest, as this is often conditional based on continued employment.
What is short term capital gain?
Short-term capital gain happens when the holding period begins a year after the sale of shares. Capital loss happens when sale proceeds are less in value than the basis. A maximum of $3,000 each year of capital loss gets deducted against other sources of income.
Do stock options get taxed?
An employee who has regular stock options will be taxed when they use their right to purchase stocks. The value of stocks on the exercise date will be added to the compensation, with the purchase price for the stocks subtracted. This is known as the bargain element of stock options.
Is an incentive stock option the same as regular stock options?
Incentive stock options are not the same as regular stock options. When exercising incentive stock options, there is not an amount that's taxed as compensation. When shares acquired through incentive stock options are sold before a year after exercise or before two years of the option grant, the bargain element will be taxed in the stock sale year as compensation.
Is stock grant taxed?
Compensation. The worth of the shares that are given as a stock grant get taxed as regular compensation. The calculation of this often happens after the vesting period has occurred, since the employee isn't restricted from selling their stock anymore.
