Guide to Employee Stock Options

Some companies will offer their employees stock options on a contractual basis. Usually, employers will provide these stock options to employees privately, and they comprise a portion of the employee’s contract. Employers choose between vested or non-vested stock options for their employees, and employees have to agree to certain conditions regarding stock options.

Long Term Incentives

Employees can’t immediately sell their stock options, rather, they have to retain ownership of the stock options for a set period of time. Employers will usually require that their employees’ stock options be non-transferable. Normally, stock purchases are transferable, but the company has an incentive in creating investors whose stocks are non-transferable.

If employees perform exceedingly well, some companies will offer extended stock options. Some companies will even offer a variety of different stock options to top employees. The company will generally establish the strike price of the stock before offering employee stock options.

Some Advantages of Employee Stock Options

The established strike price allows employees to exercise stock options once specific pricing occurs. This means that employees of the company have a competitive advantage over some other stockholders. The initial stock offering usually determines the strike price of the stock, although different sized companies will usually offer relatively different strike prices on stocks.

Both large, well-established companies and smaller companies offer stock options to employees. Sometimes, small companies will offer stock options to employees so that they don’t have to pay them such high salaries. More established companies generally offer stock options to their favorite employees. They provide stock options as an incentive to keep these employees working at the company.

Extending Your Investment

Long duration periods distinguish employee stocks from traditional stocks. Some companies have built stipulations so that employees can extend their stocks for up to ten years. Standard stocks expire after thirty months. The majority of employee stock options are taxable, although this depends on how the stock options are structured by the issuing company.

Employee stock ownership differs markedly from employee stock options. Companies that offer stock ownership to employees are basically offering a form of a retirement plan to their employees by giving them stock ownership in the company. These terms mean very different things, but are often confused. As an employee, you should carefully analyze stock options so that you are sure about the deal that you are getting.

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