From considering potential tax implications to understanding structured stock option plans, here are 11 answers to the question, “What are some helpful things to know about stock options when working at (or starting) a startup?”
- They Can Be Complex and Risky
- Remember the Right to Purchase a Stock
- It’s a Game of Liquidity
- A Great Tool to Attract and Engage Employees
- Know the Terms of Your Stock Option Agreement
- Stock Options Fluctuate and Can Be Locked Down
- May Turn Into the Proverbial Golden Handcuffs
- Find the Right Time to Set Up an Employee Stock Option Plan
- Understand the Strike Price
- Don’t Forget the Option Cliff
- Inform Yourself About the Vesting Schedule
They Can Be Complex and Risky
One thing to keep in mind about stock options when working at a startup is that they can be a valuable form of compensation, but they can also be complex and risky. It’s important to understand the terms of your options agreement, including the vesting schedule, exercise price, and expiration date.
You should also consider the potential tax implications and consult with a financial advisor or tax professional. Keep in mind that stock options are not guaranteed and their value can fluctuate based on various factors, such as the company’s performance and market conditions.
Overall, I believe stock options can be a great opportunity, but it’s important to do your research and proceed with caution.
Ann Young, CEO, Fix The Photo
Remember the Right to Purchase a Stock
We may purchase a specific amount of stock holdings at a predetermined price stock option instead of real stock shares. We sometimes refer to these as an award value, market price, or application price.
Since your total cost remains constant, you may profit from the increase in stock value. The hope is that you will resell your bought stocks for more money than you invested. The name “options” refers to them not forcing you to exercise them.
You must include the expiration date in your share options grant. ISOs often lose their validity 10 years after you receive them. But, if you quit the business, your option grant may also become invalid.
Samantha Odo, Real Estate Expert and Chief Operating Officer, Precondo
It’s a Game of Liquidity
Stock options can be a fantastic way to be vested in the startup’s growth you’re working for. There is one thing to be thinking about when you consider a compensation plan that includes options: liquidity.
The only time that you will ever see a dime from those purchased stock options is when there is a liquidation event. Ideally, the company is going public via an IPO or selling to a larger company.
Your company may continue to grow and raise money, but market conditions can transform your ability to turn your options into cash. Something to think about!
Roman Villard, Founder, Full Send Finance
A Great Tool to Attract and Engage Employees
When working at or starting a startup, stock options can be an important tool for motivating employees and attracting top talent. However, it’s important to understand that stock options are not a guaranteed path to wealth. While they can provide a potentially lucrative financial reward, they only have value if the company is successful.
Stock options typically represent the right to purchase shares of company stock at a certain price, known as the exercise price. If the company’s stock price rises above the exercise price, the employee can purchase the shares at the lower exercise price and sell them for a profit. However, if the company’s stock price doesn’t rise or even decline, the options may never be worth anything.
It’s also important to note that stock options usually come with restrictions and vesting schedules, meaning the employee may not have access to the full value of their options right away.
Luciano Colos, Founder and CEO, PitchGrade
Know the Terms of Your Stock Option Agreement
When you accept a stock option from a startup, it’s important to understand the terms of the agreement. This includes understanding when you can exercise your options, how many shares you will receive, and what type of stock option is being offered (such as a non-qualified or incentive stock option).
It’s also important to know whether there are vesting restrictions on your options, so they must be held for a certain amount of time before you can exercise them. Understanding the agreement beforehand will help inform you about your stock option rights and obligations.
Martin Seeley, CEO, Mattress Next Day
Stock Options Fluctuate and Can Be Locked Down
It’s important to understand that the value of stock options is not guaranteed and can fluctuate based on various factors, such as the company’s financial performance, market conditions, and investor sentiment.
There may be restrictions on when you can exercise your stock options and sell the underlying shares, such as vesting periods and lock-up agreements. So, it’s crucial to review and understand the terms of your stock option agreement carefully to make informed decisions about your equity compensation and overall financial situation.
James Scott, Founder, Embassy Row Project
May Turn Into the Proverbial Golden Handcuffs
The executive team isn’t required to disclose everything to a larger audience and is frequently unmotivated to do so. In Silicon Valley and other states with high-performing, high-capital enterprises, the prevailing rule is to not disclose too much, especially to departing staff.
Employees typically receive transparency packets known as the Schedule of Exceptions, which are typically predominantly canceled stock option agreements, with a round of investment or merger to prevent employee litigation.
It can be difficult for employees to decide whether to spend money to exercise their stock options because the general counsel and CEO get to control how much communication can really go to the workforce. In a situation when there is a tight deadline, this can be very devastating.
Janie Doyle, Marketing Director, SC Vehicle Hire
Find the Right Time to Set Up an Employee Stock Option Plan
You need to find out the right time to set up an employee stock option plan when your business is in the early stages of growth. If you decide on ESOP at the right time, you can keep talented employees in the firm. Having ESOP early is not only beneficial for employees but also for the business owner.
However, you know that Employee Stock Option is low in an early-stage startup. Well-established companies offer a high stock option for employees. If you offer ESOP at the right time, employees can think of spending a long period in your company.
Getting in late on the same can lead to losing talent. It can have an adverse effect on the growth of the startup. With proper research, business model analysis, and legal advice, you can decide on the right time to set up an employee stock option plan.
Saikat Ghosh, Associate Director of HR and Business, Technource
Understand the Strike Price
The strike price of your stock options is the price at which you can purchase the company’s shares.
They usually set the fair market value of the company’s stock when granting the options. Make sure you understand the strike price and how it will affect the value of your stock options.
Michael Chen, Growth Director, Notta
Don’t Forget the Option Cliff
This pertains to a period, typically one year, after which an employee’s stock options vest on a schedule.
Employees do not have any vested stock options during this initial period and thus have no equity in the company. This means that if an employee leaves the company before the option cliff expires, they will not receive any vested stock options and will effectively forfeit their potential equity in the company.
While this may appear to be a disadvantage, it actually serves as a method for the company to ensure that employees commit to the company and not just use it as a stepping stone. It also gives employees an incentive to stay with the company for at least the first year, which is a critical year for startups.
Sunny Kumar, Founder and Marketing Specialist, TheWPX
Inform Yourself About the Vesting Schedule
In stock options, it is important to understand the vesting schedule and how it works. Vesting schedules are structured plans for the distribution of stock options, which typically involve the granting of a certain number of options over a specified period.
Knowing this information can help you determine the value of your stock options and plan your financial future accordingly.
Ranee Zhang, VP of Growth, Airgram
