There are plenty of reasons why you might want to work for a business startup. These small companies may require you to work additional hours, wear many hats, and start at a lower salary than their corporate competitors, but you gain a lot in the process.
For many, startup operations offer the opportunity to take on leadership roles, accept higher level positions or advance more rapidly, all while enjoying a work environment that has a family feel to it, as opposed to a cog-in-the-machine vibe common to large corporate entities.
In addition, financial sacrifices early on could lead to incredible payoff down the line once the business launches an IPO, if it brings in major investors or is acquired by a larger company. Often, startups offer stock options as part of a signing bonus or benefits package in lieu of higher salaries.
It’s important that you understand what employee stock options are so that you can make informed decisions when reviewing a benefits package. Here are a few common questions answered.
What is the Difference Between Stock Grants and Stock Options?
Stock options are often confused with stock grants. Stock grants occur when a publically traded company gives actual stock, free of charge, to employees as a form of compensation, perhaps as a hiring incentive or as an annual bonus.
Stock options, on the other hand, guarantee a set number of stocks for purchase by an employee at a set price, usually below market value. This allows employees to purchase stocks and then sell them at a profit, virtually increasing their compensation. Employees may also choose to exercise options (or buy the stock when it vests) and then hang onto it in the hopes that prices will improve, earning them more money at the time of sale.
Startups often provide stock options rather than stock grants because they have yet to IPO, or make an initial public offering, at which time stock in the company becomes available for sale and the company becomes a publically traded entity.
When Will Stock Options Become Available?
The answer to this depends on the company. Because many startups do not know the exact date of an IPO, they may not be able to tell employees when stock options will vest.
Once IPO occurs, options can vest (or become available for purchase) in a variety of ways. Some may vest immediately while others could come with vesting dates set to a number of months or years after hire or following IPO.
Will I be Taxed on Stock Options?
No, you cannot be taxed when you are granted stock options or when you exercise them. You can only be taxed on profit from stock you have sold.
What happens to my options if I lose my job?
While you retain ownership of any stock you hold when you leave or are let go from a job (unless your contract specifies that you must sell it upon termination of employment), stock options do not proffer the same privilege. Unfortunately, any stock options you have failed to exercise or that have not vested at the termination of your employment will be lost.
What Happens to My Stock Options if the Company is Acquired or Merges?
Often, your options will carry over and be transferred to your new employer, sometimes gaining value or resulting in additional options in the process. It will, of course, depend on the negotiations between your company’s executives and the company acquiring or merging with yours, but it is extremely unlikely that your options will be lost, unless you lose your job in the process.