Getting Stock Options As Part Of Your Employment Benefits

More and more these days companies are offering their employees stock options as part of their employment benefits. But what do this options actually entitle you to, and are there any pitfalls you should be aware of if you decide to exercise the option?

Essentially, equity options are an option provided to you by your employer that entitle you to the right to purchase a specified number of shares in your company's stock during a given time at a price set by your employer. Ordinarily the asking price is discounted from the current trading price; or is set at the current prevailing market rate, with the option to purchase being set at a later date. In the case of the latter share option, the management of the company you work for are hoping that over time the value of the company's stock is going to rise (no doubt in no small part due to your endeavors), whilst the price you have the right to purchase at is set. This way the management can offer its employees and incentive scheme to work harder. It also, however, worked as a good recruitment method as employees feel they start to own a piece of the company for whom they work (the reality, of course, is that unless you are senior management, your stock equates to a very small percentage of the company's overall issued stock!). All in all then, it's good for moral.

Problems with this type of arrangement do, however, start to arise when tax is brought into the equation. Questions do arise as to whether or not income tax needs to be computed – and, if so, at what time: when the option is granted, or when the option is exercised. Also, if you exercise your option to purchase the shares, and then immediately sell the shares, are you subject to capital gains tax – bearing in mind that you have purchased the shares at a discount to the prevailing market rate, but not necessarily at a discounted rate to the rate prevailing when the option was granted. So, some fairly complex tax issues need to be addressed so that the structure is set up in accordance with all relevant laws. One final problem that may linger with options of this nature is what happens if an employee leaves during what is called the “vesting period”. The vesting period is the period between the day on which the option is granted and the day on which it can be exercised (ordinarily this period is around 5 years). So, if an employee leaves, do they forfeit the right to exercise the option at a future date – when they are no longer employees of the company? The answer here would appear to be that you do forfeit any future right to exercise a right to option company shares, unless the program is structured in such a way that this is no so.

Whatever the case may be, whilst it is always nice to feel like you are getting something for nothing, keep in mind that most employees need to sell the shares as soon as they have exercised the option: to pay the tax man!

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