What are Employee Stock Options, and why should I care?Submitted by Eric Nichols, ChFC, AIF® | Empowering Your Financial Future on October 28th, 2020
As a young gun in the industry, you might not care about your employee stock options, but for those who pay attention, there are potential benefits. In this article we are going to look at two things, first what exactly are employee stock options, and secondly why you may want to consider taking advantage of them.
What are stock options
Employee stock options are simply an opportunity for employees of a particular company to buy stocks in the company at a preferred price. This preferred price is fixed and is often referred to as the strike price or grant price of a stock. These stocks typically have a vesting period to help with employee retention, and some also have an expiry date.
Stock options have been around for years and have typically been utilized by larger companies to retain employees and help them buy into the company. However, in the last couple of years stock options have become an option for start-ups who are looking to attract top talent, but may not be able to offer the higher salaries. So, now that we have gone through what an employee stock option is, why should you care?
Why you should care about employee stock options
Employee stock options are not an option with every company, and for those who have the opportunity, it may be something worth considering. Here are a couple of benefits to consider.
- You get preferred pricing
- For those who have employee stock options, you may notice that the listing price of your stock may be quite a bit higher than the preferred pricing that you have been offered. Although the difference can be considered taxable income in certain areas, there are potential benefits. This is especially true if you are working with a company whose stock is on the rise; however, there is a risk that your share may drop, or even become worthless, depending on how the company does. Like all investments, it is best to chat with a financial professional before making any big decisions.
- Can be done through payroll deductions
- Many larger companies make employee stock options easier by offering it as a payroll deduction. Employee stock options are a benefit of working in private industry and may be an attractive and straightforward investment opportunity, especially as a passive investing tool. However, depending on where you live, employee stock options may have some tax implications, so make sure to chat with a financial professional before making any big decisions with your money, especially with employee stock options.
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