Many Facebook and Google employees have become millionaires because of employee stock options. While employee stock options don’t always translate into overnight fortune, they could be worth a lot of money in future years. The CGS Team is sharing some information about stock options and why you may want to consider taking advantage of them through your employer.
What are employee stock options?
Stock options offer employees of a company to take advantage in the growth of the company and its share price. Options are given for many reasons, including performance, length of service, sign-on bonuses and more. Options can also be purchased as a retirement assent.
According to Go Banking Rates, “A stock option is a financial instrument that gives you the “option” — but not the obligation — to buy a stock at a certain price. The valuation of a stock option depends on its strike price, or exercise price, which is the price at which you can buy the underlying stock to which the option is attached. Your stock option will be worthless until the price of the underlying stock rises above the strike price.”
Most stock options come with a vesting schedule. A vesting schedule indicates when you have the right to buy the stock at the strike price. There is also a timeframe for exercising the stock option before it expires. If you miss the timeframe, which is typically around 10 years, you won’t be able to purchase the stock at the strike price.
How do stock options work?
The life of a stock option begins once it’s granted to the employee. When you receive the option, it should come with your exercise price and vesting schedule. Let’s say you’ve been at a company for many years and you are fully vested in your options, which were granted at a strike price of $30. If the stock is currently trading at $50 per share, your option would be worth $20 per share, if you decide to exercise it. The difference between the current market value of a stock and the option’s stock price is the actual value you will receive.
Employee stock options have amazing potential because they are granted rather than bought. If you have stock options you want to exercise, you would pay the exercise price ($30 in the example above), and you will own the stock. You can hold on to the stock if you think the price will go higher, or you can sell and take your profit. One thing to keep in mind is if the option never reaches the strike price, you haven’t lost any money because you were never able to exercise it.
Options are popular in startups because the earning potential is so high. If the start-up becomes publicly traded one day, the income potential is definitely there.
Pros and cons of stock options
Like anything, there are pros and cons for participating. The same applies to employee stock options. Here are a few of the pros and cons for taking part in employee stock options:
-No cost to the employee until exercising the strike price
-Ability to participate in a company’s growth
-Vesting schedule can delay ownership
-Possible loss of options if you quit or are fired
-Options expire if not exercised in time
Related: Easy Ways to Start Investing Now
Although employee stock options may not pay off immediately, it could pay off nicely over time. If trade in the stock market, you put your own money at risk. An employer-sponsored option plan, on the other hand, gives you the chance to participate in a future upside without any downside risk. If you have the option available to you by your employer, take advantage!
Do you participate in your company’s employee stock option? Have you taken advantage in the past? Share your thoughts, questions and experiences with employee stock options by leaving a comment below!