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

kevin MacWilliams |

As a young gun in the industry, you might not care about your employee stock options, but for those who pay attention, they may be a consideration. In this article we are going to look at two things, first what exactly are employee stock options, and secondly why you should consider 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 utilized 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 option for start-ups to attract top talent instead of a high salary, the company may offer a better 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?

Employee stock options are not an option with every company, but for those who have the opportunity, it is undoubtedly an option you may want to consider for these three reasons; 

  • 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 may outweigh that. This is especially true if you are working with a company whose stock is on the rise; however, there is a risk that your shares 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 may be an option as not only are you able to purchase stocks at a preferred price; you can also utilize the money saved to buy other investments to diversify your portfolio starting early in your career. 

  • Can be done through payroll deductions

    • Many larger companies allow you to purchase employee stock options through a payroll deduction. 

Employee stock options may be a benefit offered when you are working in the private sector and can be an attractive investment opportunity, if your goals, time horizon, risk tolerance, and specific situation are considered. However, depending on where you live, employee stock options may have some tax implications, so make sure to chat with a financial professional or tax advisor before making any big decisions with your money, especially with employee stock options.

Diversification doesn't assure a profit or protect against loss.