What Are Stock Options?

Apr 07, 2023 By Triston Martin

Compensation might be received in the form of stock options. Employees, contractors, consultants, and investors are all potential recipients of such awards from companies. An employee is given the right to acquire, or exercise, a certain number of company stock shares at a price determined in advance. This price is referred to as the grant price. These options are contracts.

But keep in mind that this deal won't be available long. You have a certain period to put your options into action before they become invalid. It's possible that before you leave the firm, your employer may demand that you go through the motions of exercising whatever options you were given.

The number of stock options an employer will make available to its staff members varies from firm to company. It will also rely on the employee's level of seniority and any specific abilities they possess. Before any employee is granted stock options, the investment community and any other relevant parties must approve.

How to Figure Out How Much Money Your Stock Options Are Worth

The value of stock options might be difficult to ascertain if the company in issue is not publicly traded. There is no certain method to identify the true value of a share of stock in the absence of a monetary event such as an initial public offering (IPO) or the sale of the company. This is because many different estimates of a company's stock value are bandied around.

Certain companies will get a valuation that you may use to evaluate the value of your stock options; however, they are speculative to some degree and shouldn't be depended on to any significant degree. To calculate the price of a share of the company's stock, you will need to be aware of the total number of shares that are put up for sale by the business.

The calculation will be a breeze if you are familiar with the share price. The striking price of a stock option is the lowest price at which the underlying shares must be purchased to exercise the option. The value of your shares will be $10 ($20 minus $10) if the current share price is $20 because the strike price is $10 and the current share price is $20. Following that, you may determine how much your stock options are worth by multiplying $10 by the number of shares for which you hold options.

How to Put Your Stock Options to Work

When your options have been vested, you will have the power to put them into exercise. This indicates that it is possible to purchase company stock shares. Unless you exercise, your options do not have any actual worth. The contract you signed at the beginning of your employment outlines the fees you will be required to pay for using those options. This price is also sometimes referred to as the grant price, the strike price, or the exercise price. This pricing will not shift, regardless of how well (or unsuccessfully) the firm operates.

Let's imagine that your four years have passed, and you're now in possession of 20,000 stock options with an exercise price of only one dollar each. You would be required to pay $20,000 (20,000 units of $1) to use all of your options. When you have exercised your option, you will fully own the stock and will be able to dispose of it as you see fit. Alternatively, you might keep it and keep your fingers crossed that the share price will continue to rise. It is important to remember that in addition to paying any applicable taxes, fees, and commissions, you will also be responsible for paying any costs associated with exercising and selling your options.

When Should You Put Your Stock Options Into Action?

Whether you should exercise your stock options and how you should do so will rely on several different things. To begin, it is recommended that you hold off until the firm begins trading publicly, supposing it will. If you do not wait and your firm does not go public, the value of your shares may drop below what you paid for them, or they may even become worthless.

Second, after your firm has had its initial public offering (IPO), you won't want to exercise your options until the stock's market price has risen to a point where it is higher than the price at which you were able to execute those options. Consider the following scenario: the exercise price for your option is $2 per share. If the current price on the market is $1, then it would not be prudent to execute your options at this time. Buying anything on the market is the best option for you.

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