- When to Exercise Stock Options?
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- Job Events - Termination -
- Make Sure You Understand Any Stock Options You May Have
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A stock option is a contract that gives you the right, but not obligation, to buy a stock at an agreed-upon price and date. The price at which you can purchase the stock is called the exercise price, or strike price. So if your employer grants you options, you do not own shares. Rather, you have the option to buy shares at the aforementioned strike price. Doing so is called exercising your option.
When to Exercise Stock Options?
Exercising your options can be expensive, so deciding when to exercise is going to depend on your personal financial situation. One of the best times to exercise your options is one year before the IPO, as described by Wealthfront here. The problem preventing many people from using this approach is that it often requires fronting a significant amount of cash to exercise your options. In a cashless exercise, your employer or a brokerage firm will give you a loan to exercise the options, then sell the stock at market price immediately.
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You then use the proceeds from the sale to repay the loan. Typically the mechanics of the process of receiving the loan, selling the stock, and repaying the loan is hidden from the employee, and he or she will simply receive the proceeds after the whole transaction is complete.
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Early exercising is a good idea when you either have high confidence that the company will have a successful exit or the total cost to exercise is affordable. This approach has 2 major advantages:. Facebook Twitter Linkedin. What is a Stock Option?
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For startup companies, many stock option grants are subject to time-based vesting over a period of four years, with 25 percent cliff vesting on the one-year anniversary and the remainder vesting on a monthly basis thereafter. At the time of your departure, you are generally allowed to exercise the vested portion of your stock option awards, and you will forfeit the unvested portion.
If you are planning on leaving your job, you should review the details of your vesting schedule. You may decide to delay your departure to ensure that you do not leave prior to the vesting of a substantial portion of your option grant.
Make Sure You Understand Any Stock Options You May Have
For example, if your options are subject to cliff vesting, you forfeit your entire grant if you leave prior to the cliff date and you will not receive a pro-rated portion of the award. Due to certain tax and securities laws, as well accounting rules, it is very common for stock options issued by private companies to have a term of up to ten years from the date of grant.
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The post-termination exercise period, however, is almost always shorter than the applicable term of the stock option grant, absent a termination of service. The post-termination exercise period generally starts on the date of termination ie, the actual end of your service with your employer, not the date when you give notice. Your stock option documents are the only reliable and binding sources that determine your contractual rights, including vesting terms and how long you have to exercise your stock options after your termination of service.