Employee Stock Options (ESO)

A stock option is a security which gives the holder the right to purchase stock usually common stock at a set price called the strike price for a fixed period of time. Stock options are the most common form of employee equity and are used as part of employee compensation packages in most technology startups.

If you are a founder, you are most likely going to use stock options to attract and retain your employees. If you are joining a startup, you are most likely going to receive stock options as part of your compensation.

This post is an attempt to explain how options work and make them a bit easier to understand.

Stock-Based Compensation: Liability or Equity?

Stock has a value. Last week we talked about how the value is usually zero at the start of a company and how the value appreciates over the life of the company.

The laws have gotten stricter in recent years and now most companies do something called a a valuation of their common stock to insure that the stock options are being struck at fair market value.

I will do a separate post on a valuations because this is a big and important issue. There is a very big business on Wall Street valuing these options and trading them. And the longer the option term, the more value they have.

But if the stock does not appreciate, and most importantly if the stock goes down, the option holder does not lose money. Most stock options in startups have a long holding period. It can be five years and it often can be ten years. That explains why options are a great way to compensate employees. Those two things are vesting and exercise. I will address more issues that impact options in future posts in this series.

Stock options are both an attraction and a retention tool. Vesting usually happens over a four year term, but some companies do use three year vesting.

If it were to vest over four years, you would take ownership alpha financial markets jersey the option development of nigerian stock exchange the rate of 2, shares per year.

After that most companies vest monthly. The nice thing about vesting is that you get the full grant struck at the fair market value when you join and even if that value goes up a lot during your vesting period, you still get that initial strike price.

Vesting is much better than doing an annual how to earn money student india every year which would have to be struck at the fair market value at the time of grant.

Exercising an option is when you actually pay the are employee stock options liabilities or equity price and acquire the underlying common stock. There arbitrage in binary option 3 perm two common times when you would likely exercise.

The first is when you are preparing to sell the underlying common stock, mostly likely in connection with a sale of the company or some sort of liquidity event like a secondary sale opportunity or a public offering.

You might also exercise to start the clock ticking on long term capital gains treatment. The second is when you leave the company. Most companies require their employees to exercise their options within a short period after they leave the company.

Are employee stock options liabilities or equity - iwysuhod.web.fc2.com

Exercising options has a number of tax consequences. I will address them in a future blog post. Be careful when you exercise options and get tax advice if the value of your options is significant. That's it for now. Employee equity is a complicated subject and I am now realizing I may end up doing a couple months worth of MBA Mondays on this topic.

And options are just a part of this topic and they are equally complicated. I'll be back next Monday with more on these topics. October 18, — MBA Mondays. AVC Menu Home Archive About Subscribe Twitter. Options A stock option is a security which gives the holder the right to purchase stock usually common stock at a set price called the strike price for a fixed period of time.

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