Stock options are considered by the majority of companies to be the most well-known form of equity compensation. They are a contract that gives you the right (but not the obligation) to purchase a specific number of company shares for a pre-set price and an agreed future date.
Startups use stock options as an effective incentive vehicle. One that is designed to hire and retain talent and give those employees more skin in the game.
The pre-set price at which your allocation of stock can be purchased is known as the “strike price” or “exercise price”. The options you are granted allow ownership over a fixed period of time. This is known as the “vesting period”. When your options reach this vesting period it means they are yours although you will still need to purchase them.
The majority of startups will offer employees ISOs (Incentive Stock Options) although you may be offered NSOs (Non-qualified Stock Options).
ISOs are classed as a corporate benefit. They give employees the right to purchase (at a discounted price) shares of company stock. An added benefit comes with potential tax breaks on any profit.
NSOs are a form of equity compensation. These can be provided to employees as well as other stakeholders. Taking advantage of an NSO gives you the choice of purchasing a company’s stock at a predetermined price. This can prove to be profitable if the stock price rises beyond that level.
While there are obvious benefits to stock options there are also lots of issues to be aware of if you are to maximize returns on the hard-earned stock options that you have been granted. To understand more please Click here