Employee stock options are contracts which give you the right to buy a set number of shares of the company’s stock at a specific price over a finite period of time. You don’t have an obligation to do it, though: That’s why it’s called an “option.”
For early employees at firms that end up being successful, the arrangement can be a win-win. Employers can dangle a carrot in front of early employees to keep them engaged in their work, and don’t have to part with as much cash up front. Employees who stick things out have the potential to make a big profit if the company goes public or is acquired and their shares become more valuable than what they agreed to purchase them for.
Any equity offer will come with a contract stipulating the rules for buying and selling them. “No two plans are written the same,” says Sam Huszczo, a certified financial planner and founder of SGH Wealth Management in Southfield, Michigan. “A lot of times, someone is so excited to land a new role or get a new title, and they’re so excited to reach that goal that they don’t really care what their stock option contract really says.”
How to negotiate for better terms
Beyond the basics, understanding options arrangements can get tricky, especially if you’re not considering what may happen if you leave the company — voluntarily or not.
“All too many times, people don’t look at the agreement until they’re ready to leave, and they find out they weren’t efficient in utilizing the benefit while they were at the company,” says Huszczo. “If you’re going to get a high amount of equity compensation, you gotta do a little homework.”
If you don’t, you could find yourself in a situation where you have the option to buy shares but can’t afford them.