How Employee Stock Options Work and Ways to Maximize Them

The value of your stock options will depend on set of factors like the price of your shares, how many shares you're awarded, and how the company performs.

Stock options are a performance-based equity compensation program that is offered to employees of many tech companies. Employees who are eligible to receive stock options must meet predetermined performance criteria and other eligibility requirements before they can be granted stock options. If you’re thinking about joining a company as an employee, or you’re already working for one and want to understand your stock option benefits better, this article is for you. In this article, we cover everything you need to know about employee stock options and how they work so you can get the most from them.

What Are Employee Stock Options?

Employee stock options are a form of equity compensation that is typically granted to employees of a company as part of their compensation package. They are a contractual agreement between you and your employer to buy shares of the company’s stock at a predetermined price. Stock options are a great way to attract and retain employees because the option doesn’t have to pay anything upfront for the stock. 

Their value is based on the price of the stock and the company’s performance. If the company’s stock price increases, the employee could make a significant amount of money by exercising their stock options and selling the shares. If the company’s stock price declines, the employee can choose to do nothing, as they are not required to purchase the shares at that time. Employee stock options are different from restricted stock, which is a form of equity compensation that the company awards to employees in the form of company stock that can’t be sold until it vests.

How Do Stock Options Work?

The process of granting stock options to employees and the way they function is similar to the way a regular stock purchase works. A company will decide on a stock price and the number of shares that employees can purchase through their options. The employee pays nothing upfront for the option but decides when to exercise the option. 

This can be done anytime after the option is granted, but it typically happens when the company’s stock is trading at a higher price than it was when the option was granted. When the employee decides to exercise their option, they buy the shares at the predetermined price. After the shares are purchased, the employee can do whatever they want with them.

When and how are stock options granted?

This is one of the biggest factors that determine how valuable your stock options will be. When you are granted stock options, it’s for a set amount of shares that were determined at the time of hire. This can be a percentage of your salary, or it can be a set number of shares. 

For example, your company might grant you options to purchase 10% of your salary each year over the next four years, or they might grant you a specific number of shares of their stock. The percentage of your salary that you receive through stock options is determined by the company. The number of shares of stock that you receive through your options is based on how many other employees are granted options and how much the company is trying to raise through option grants.

Are There Any Benefits to Receiving Stock Options as a New Employee?

The main benefit to receiving stock options as a new employee is that you don’t have any vested financial interest in the stock until they are granted. This means that if the company’s stock declines in value, you don’t have to purchase any shares because you don’t have any vested interest in them. This can be a big benefit if a company’s stock price declines in value because it’s likely to increase again in the future. 

It’s also a benefit because you don’t have to pay taxes on the shares until you actually purchase them. When you receive restricted stock, you have a vested interest in the company’s stock as soon as you receive it. This means that if the stock price declines, it can be difficult to sell the stock without taking a major loss because there are fewer people interested in purchasing it.

What You Should Know Before You Decide to Accept Stock Options

There are a few things you should be aware of before accepting stock options if you want to obtain them as part of your pay package. First, the number of shares that you are granted and the price at which those shares are valued are determined at the time of hire. 

One of the key determinants of how valuable your shares will be is the price at which they are valued. Typically, the lower the price at which your shares are valued, the higher the number of shares that you will be granted. For example, if you’re granted options to purchase 10,000 shares at $0.10 per share, you would probably have more valuable options than someone who was granted the same number of shares at $100 per share.

Conditions for Granting Stock Options

Before you accept a job offer and decide to receive stock options as part of your compensation package, you should make sure that the offer contains the following:

- The number and type of shares that you will be granted through your stock options

- The price at which those shares will be valued

- The length of time during which you will have the option to exercise your options.

If one or more of these things isn’t included in the offer, you should ask your future employer what they are and request them in writing before you accept the offer.

How to Maximize the Value of Your Stock Options

The best way to maximize the value of your stock options is to do everything you can to help the company succeed. This means that you should do your best at work and do what you can to help the company achieve its goals and live up to its potential. 

You can also take steps to increase your company’s stock price and the value of your stock options. These include: 

Keeping informed: Read the news and follow the company’s progress to stay up to date on what’s happening. 

Taking ownership of your job: Be proactive and take ownership of your job and the company as a whole. 

Being a positive contributor: Be as helpful as possible to your co-workers and supervisors. 

Networking: Build relationships with people within the company and with others in the industry that can help your company succeed.

Key things to know about employee stock options

Stock options aren’t guaranteed: Just because you’re awarded stock options doesn’t mean that you will receive them. The company can choose not to grant you options for any reason or for no reason at all. 

You don’t have to exercise your options: You don’t have to exercise your options as soon as you receive them. You can hold onto them and do nothing if you want to. 

There are rules around when you can and can’t exercise your options: There are rules in place that determine when you can exercise your options, such as only being able to exercise them during a set time period after your company goes public. 

You will have to pay taxes on your options: When you decide to exercise your options, you will have to pay taxes on the amount that you receive.

Final Words: Should You Accept This Benefit?

Stock options are an excellent benefit to receive as an employee, especially if you’re working at a company that has a high potential for growth. The value of your stock options will depend on a number of factors, including the price at which your shares are valued, how many shares you’re awarded, and how the company performs. If you’re offered stock options as part of your compensation package, you should accept them. They are a valuable benefit that can help you to earn significant money in the future.