Stock Options
When a company offers you stock options, they are giving you the right to purchase a specified number of shares in the future at an agreed price and on a defined timeline.
A key point is 'the right' but not the obligation to buy!
An option agreement will typically specify the following:
The exercise price: This is the price, agreed at the outset, that you will have to pay per share when looking to exercise your options.
The grant date: This is the date you are formally awarded the options. This may be before or after the vesting start date.
·The vesting schedule: This determines how much time must pass before you can exercise your right to buy the shares. It is not uncommon for the vesting process to take place over four years, with shares gradually vesting over that period.
The cliff: This refers to the minimum period of time you must remain with the company before the shares begin to vest. A cliff will be indicated in your vesting schedule. It is common for a vesting schedule to contain a one year cliff. Where a one year cliff is indicated, the first tranche will vest and become exercisable after a year.
Vesting start date: This is the date that your vesting schedule kicks in and your award begins to vest. As detailed above, this may be before, after or on the grant date.
The cliff: This refers to the minimum period of time you must remain with the company before the shares begin to vest.
Expiry date: Under the terms of the agreement, an employee will need to exercise their options within an agreed time window or they will expire – 7/10 years being a typical timeline.
Exercise: Exercising your options means purchasing shares subject to the exercise price set at grant date and subject to the vesting schedule applied to your award.
Benefits of receiving Options
You are largely in control of the process. Once the options have vested, you can choose your moment to purchase the stock. The key upside here is that you can monitor the value of the shares at any given moment relative to the grant price. This means that if the value has increased, you can buy at a lower price. Then, you can choose to sell for a profit or hold on with a view toward seeing the value of the stock increase even more… which it may or may not do. There are no guarantees on that front, but the basic scenario is quite advantageous for employees.
# Stock options give you the chance to hold an ownership stake in the company, which can make you feel more connected to the business. This, in turn, can increase your engagement levels and basic motivation, all of which can impact positively on your general sense of purpose and well-being.
# When the business thrives, the value of the shares will increase. In time, this could see you make far more money than if your remuneration is 100% salary based.
# There can be tax advantages associated with stock options. As mentioned previously, taxation arrangements will vary in different jurisdictions.