In today’s startup-heavy world, it is becoming more common for employees to receive company-gifted stock options from their employers. However, it can be tough to know what to do with these stock options. Instead of just letting them sit untouched, here’s what you could be doing.
What is a company-gifted stock option?
A company-gifted stock option is the right to buy the company’s stock at a fixed price for a specified number of years (usually five to 10). If you don’t exercise the stock option within that period of time, it expires.
These stock options benefit a company because they can help drive up its price, while employees benefit by purchasing valuable stock at a discount. Employees who have stock in the company they work for are also more invested in making the company — and their company stock — profitable.
What should I do with this option?
You can choose to exercise your option, or buy the stock at a fixed price, during that previously agreed upon time frame. You may want to do this early on, especially if you believe the stock price of your company could increase.
Am I taxed differently for this?
Sort of. This type of investment is considered taxable income, so when you sell the shares, you will likely have to pay a tax. Check in with your accountant or financial adviser on this, though. Laws may differ in your state (and have recently been overhauled at a federal level).
How long should I hold on to these stocks?
That is up to you. You obviously want to make money on these options, so any time the stock price is higher than your initial purchase price, it could be a good idea to sell. Like all other investing, we can’t tell you exactly when to buy or sell. If we could, we’d be billionaires.
Can I sell them? When should I sell them?
Of course! Just like regular trading, you want to make a profit. Talking with a financial planner may be helpful in this situation.
If I’m offered stock options, should I take them? Or should I simply ask for more cash?
It depends on the company you work for. If you believe that the company’s share price will increase, it is a smart choice to exercise your stock options. If you want something a little more solid, you can attempt to negotiate by saying you would rather have a higher wage instead of stock options.
- Alicia McElhaney / She Spends Issue #43