What are Employee Stock Options, and why should I care?

What are Employee Stock Options, and why should I care?

by Ray Sagner on Mar 12, 2020

As a young gun in the industry, you might not care about your employee stock options, but for those who pay attention, the benefits are enormous. In this article we are going to look at two things, first what exactly are employee stock options, and secondly why you should care and take 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 were utilised 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 excellent option for start-ups to attract top talent as instead of a high salary, the company can offer an excellent price on stocks for upper management and key positions. 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 is undoubtedly an attractive option and here are three reasons why. 

  • You get preferred pricing

    • For those who have employee stock options, you will notice that the listing price of your stock is quite a bit higher than the preferred pricing that you have been offered. Although the difference can be considered taxable income in certain areas, the benefits can be immense. 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 advisor before making any big decisions. 

  • They can help diversify your investment

    • When you are looking to invest, it is always important to diversify your portfolio. This is why employee stock options is an attractive option as not only are you able to purchase stocks at a preferred price; you can also utilize the money saved to buy stocks or other investments to diversify your portfolio starting early in your career. 

  • Can be done through payroll deductions

    • Many larger companies make employee stock options a breeze and can even offer it as a payroll deduction. This makes passive investment a simple process and ensures that you can continue to invest without having to actively make trades.

Employee stock options are a great benefit of working in private industry and are 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 advisor before making any big decisions with your money, especially with employee stock options.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2014-2019 Advisor Websites.