Employer stock options are often issued as part of an employee compensation package to reward and retain key employees. However, employer stock options may also apply the proverbial golden handcuffs to an employee. Leave the company before the options vest and run the risk of forfeiting your stock options and all potential value.

What Does Vested Shares Mean? - Budgeting Money

Stay until they vest, and be rewarded the ability to participate in the upside of the company. Simply put, the decision is one of the following:. Stock options are provided as part of a compensation package. Said another way, they are compensation for the services you provide your employer.

However, stock options are very different from typical cash compensation, as stock options offer the recipient the right to purchase shares of company stock at a pre-determined price the grant price sometime in the future.

Prior to reaching the vesting date, the recipient of the options has no right to exercise the shares. This means that while the share price of the stock may appreciate above the grant price, the recipient has no right to exercise their shares.

Once the options vest, the recipient has the option to act. Or should I take my money and run exercise and sell? If you want to hold the company stock, you can continue to hold the options as is, or you can exercise the options and hold the shares. This is often a strategy implemented by those seeking to treat the value of stock options as compensation only. When you exercise your stock options, you need to make an election to execute a cash exercise or a cashless exercise.

Depending on the value of your stock options, this transaction has the potential to create a large cash call. It may be so large, in fact, that it is possible you do not have the cash on hand. A cashless exercise requires no cash outlay to exercise the shares. Upon exercise, a portion of the shares are exercised and sold to cover the cost of the shares and possibly the tax liability. The end result is that the person exercising the options owns fewer shares than the cash exercise alternative.

When you exercise incentive stock options , the value between the grant price and the exercise price is an AMT preference item known as the bargain element.

Depending on the size of the bargain element, you may be subject to the alternative minimum tax. The larger the bargain element, the larger the possible tax bill. Additionally, you may want to consider how much of your financial health is tied up in one company. Your job, your income, your benefits, your social circle, and your net worth are a sizeable part of your life!

What happens if the said company takes a turn for the worse? Are you comfortable having all your eggs in one basket? Selling some or all of your company stock can eliminate concentration risk. Employer stock options can be a fantastic opportunity to generate substantial wealth. However, with great opportunity comes great responsibility. I respect your privacy. They may offer stock options, allowing employees to purchase shares at a certain favorable price sometime in the future.

Email will not be published required.

Notify me of follow-up comments by email. Notify me of new posts by email. Simone Zajac Wealth Management Group Whiteland Business Park Springdale Drive, Suite Exton, PA The views and opinions expressed herein are those of the author s noted and may or may not represent the views of Capital Analysts, Inc.

We make no representation as to the completeness or accuracy of information provided at these third party sites. Nor are we liable for any information you receive arising out of your access to or use of these third-party sites.

When you access one of these sites, you assume total responsibility for your use of the sites you are visiting. Advisory services offered through Capital Analysts, Inc. Navigation Finance and Flip Flops Confessions of a Financial Planning Junkie.

Vesting - Wikipedia

Home Main Navigation Home Start Here About Daniel Work With Me Testimonals Media Requests Speaking Contact My Firm Return to Content. Facebook LinkedIn Twitter Google Pocket Print. Managing Concentrated Equity in Company Stock and Stock Options Using After-Tax Value to Evaluate Liquidation Priority of Concentrated Equity 6 Strategies to Exercise Your Employee Stock Options The Basics of Restricted Stock Is a Non-Qualified Deferred Compensation Plan a Good Deal?

What Is a QLAC and Why Do Longevity Annuities Matter? Why Your Employee Stock Purchase Plan May Be a Great Deal.

What are Non-qualified Stock Options?

They […] What to Do with Company Stock Investing to Thrive - June 5, […] company stock at discounted prices through an employee stock purchase plan ESPP. Leave a Reply Click here to cancel reply.

Comment Name required Email will not be published required Website Notify me of follow-up comments by email. The Game Changer for Buy Term and Invest the Difference March 29, Simone Zajac Wealth Management Group Whiteland Business Park Springdale Drive, Suite Exton, PA www.