« Back to Blog
The employee's guide to accepting stock options compensation
Stock options can be a way for employers to reward or incentivize their new or future employees, especially in the start-up world. As Forbes pointed out, there is no up-front cash cost for a business, and they give employees a tangible stake in the company's long-term success.
The Federation of American Scientists reported that market research has found that between 15 and 20 percent of public companies offer stock compensation. For employees, it is important to consider the implications of accepting a stock option in place of more immediate rewards. Likewise, how and when to leverage this benefit is also crucial.
Faith in the business
It can be difficult as a new or prospective employee to fully form an opinion on a business, but the company's long-term prospects should factor heavily in any decision to accept compensation in the form of stock options.
Mashable stated that for employees that have a strong belief in their company's future success, accepting a stock option as a form of compensation is a good decision. Stock in a company you believe is destined to succeed is a good investment, and there are examples of employee stock option compensation serving even part-time employees very well.
Google may be a bit of an outlier in term's of a business' potential growth, but the tech-giant famously made its earliest employees millionaires simply through offering stock options. The company's former part-time masseuse, for example, is now very wealthy despite a starting pay rate of $450 a week. According to the New York Times, she was able to reap the benefits of the company's success through Google's employee stock compensation program, earning millions.
For start-ups, there may be a larger potential for growth than a more established business, but for that reason a stock is not as sound of an investment. Any employee offered a stock option should only accept if he feels the business will become more valuable over time, even if it may not be the next Google.
Do your homework
Faith alone shouldn't drive an employee's decision to accept a stock option in place of more concrete compensation. It would be advisable to investigate or inquire about the company's near-term projections and recent successes. Shares in a company with a cloudy or unsure future are an unwise bet, and if the higher-ups at a business are uneasy about sharing analytics and numbers, it may be possible the business is not trending toward success in the near future.
It is also worth learning more about the company's investors and board of directors. A witch-hunt style investigation isn't necessary, but knowing the track record and past affiliations of the business' biggest decision makers could say a lot about where the company could be headed. Invested venture capitalists and the like are just as concerned with improving the value of the company's stock, but past successes or failures are an important consideration nonetheless.
FAS reported that there may be a number of different types of stock option offerings, all of which are worth considering. Likewise, understanding what each offering means as a proportion of the total number of shares is critical for assessing the real value of the package.
Stock options come with more risk than standard compensation plans, and for that reason, making the decision with as much information as possible is critical. Having said that, it is also important to understand some of the most basic upsides that come with accepting a stock compensation plan.
As ProOpinion found, 31 percent of professionals believe they aren't paid as well as they should be, and stock compensation is a way for employees to improve their earning potential. Stocks may be worth more than your company's current payment structures, and as a bonus, stock options are treated favorably during tax time, according to FAS.
Stock options aren't reported as income under current tax law, and for that reason, the stock is not taxed until it is sold. So long as the stock has been held for at least two years, any earnings are taxed at a long-term capital gains rate. For most income-brackets, the rate is considerably lower than the standard income tax.
Lower tax rates added to the possibility for the value of a stock to increase makes stock compensation plans so potentially lucrative. Regardless, it is still wise to consult a tax professional before completing any stock transaction.
Outside of tax benefits, stock options as a form of compensation can still benefit employees. Even if a company never goes public, there is an opportunity to earn more than a base-line salary might yield, and even for young start-ups, it is an offer that is worth considering.
Like what you read? Great. Our blog is packed with FREE b2b content and meaningful research data aimed to help business professionals . It's free to join, all you have to do is enter a few details below.
« Back to Blog