Employee Stock and Option Compensation

Why Companies Choose Stock Options... and How Employees Can Use Them.

February 9, 2021
When companies are just starting up, they want the best of the best to join their team— but sometimes, the amount they are able to compensate their employees is simply not enough. Startups don’t always settle for less, though they often offer stock and option compensation. This is a great alternative compensation plan for companies who are not capable of offering employees their dream salary right off the bat. For example, offering stock options can provide additional compensation and allow employees to be hired at what some consider a less-than-average salary, because they’re betting on the company’s success to provide them with a bigger paycheck down the line.

What employees are saying:
59% say “my stock plan provides me with a sense of ownership in the company”
59% believe “My contributions to my company’s performance are acknowledged through the equity grants I receive “
Source: Stock Opter https://stockopter.com/key-findings-from-etrades-annual-stock-plan-participant-survey/

Adding on stock options as part of an employee compensation package is a great idea, and not just because of the increased caliber of employees that can join the team. Whether employees have just started with the company, or if they’ve been onboard since the start, offering stock & option compensation to employees can boost company morale, and increase the emotional—and financial— investment that employees have in the success of the company. Since this form of additional compensation can reward employees well if the company is thriving, this can also align goals and offer huge incentives to help a company succeed.

How Do Stock Options Work?
Owning stock options within your company all starts with your contract. This contract will lay out when your options expire, how much your options will cost to purchase, and how many you will earn over what period of time. Seeing that your employer may not always tell you everything you need to know, it's important you fully understand your contract before you decide to make any decisions with your stock options. The safest, and smartest course of action is to reach out to a financial advisor to help you make the decision that makes the most financial sense for you.

Another term you’ll need to become familiar with is the cliff, or the period of time you’ll need to stay will the company before your stocks are available for you to buy, or vest. Your grant date is when all your options are available. Your options may also become available gradually as part of a vesting period. For instance, if your cliff is a year and a half long, you’ll have to wait six years to receive your full stock of 4,000 shares. Half of your stock options might be available after three years. After you’ve been with the company for the 1.5-year cliff, you’ll be able to purchase a quarter of your 4,000 options.

Keep in mind, your contract might also specify an expiration date for vesting your options. It’s commonplace for options to expire five to ten years after the grant date. If you leave the company, vesting after you’ve moved on can only occur if you’ve stayed with the company for the cliff period or longer.

How to Exercise Stock Options
Once your stock options vest, you can exercise them. Exercising your company stock means you can actually buy shares and you’ll have to pay the set price established within the contract you received. This is also known as the grant price, strike price, or exercise price. For example, if your grant price was for one dollar and you have 4,000 options, it would cost $4,000 for you to buy all your stocks.
If you exercise your stock, you then own the stock and are free to sell it. Alternatively, you can hold your stock options with the hope that they’ll be worth more, as long as the stock price continues to rise. Remember, though, you will be responsible for any commission, fees, or taxes that come with selling your stock.

There are additional options to exercise without needing the money outright to buy your options. The first is to make an exercise-and-sell transaction. This simply means that you purchase your options, and immediately sell them. In this case, you would use the money you just made in the sale to cover the cost of buying the shares. Your other option is to make an exercise-and-sell-to-cover transaction. This means selling just enough to cover your purchase cost, and then holding the rest of your shares.

When to Exercise and Sell Your Options
There are a variety of different factors that you should account for when determining the optimal time to exercise your stock options, and when it makes the most financial sense to sell. CAM Investor Solutions can help you take all of these factors into account, and ensure your decision is the absolute best step forward when considering your long-term financial goals. Remember, exercising and selling your options impacts your income taxes, too... and we’re here to help make accounting for the additional income easy.

What Employees want to know
48% want guidance on what actions can be considered when stock plan benefits are granted and/or vested
39% want to know how stock plan benefits fit into an overall financial plan
Source: Stock Opter https://stockopter.com/key-findings-from-etrades-annual-stock-plan-participant-survey/

At CAM Investor Solutions, we maintain a transparent fee structure while utilizing a multi-generational approach that provides measurable benchmarks for our clients. We utilize an evidence-based philosophy to ensure that it is structured, yet flexible in order to help clients have a successful investment experience. If you’re ready to find a better way to protect your financial health, call CAM Investor Solutions at (720) 575-7775, or toll free at (844) 247-0787.

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