Learn more about common financial (and startup) terms here. To learn more about Pilot, fill out the form below.
Stock options are a form of equity compensation that give an investor the right, but not the obligation, to buy or sell a stock at an agreed-upon price and date. There are two types of options: puts, which is a bet that a stock will fall, or calls, which is a bet that a stock will rise. These options are contracts that create an agreement between two parties to have the option to sell or buy the stock at some point in the future at a specified price, known as the strike price or exercise price.
Employee Stock Options (ESOs) are typically issued to company employees as part of their compensation package. They provide employees the opportunity to purchase company stock at a predetermined price, usually below market value, at a future date. This can serve as a powerful incentive, aligning employee interests with the goals of the company shareholders.
Before exercising stock options, consider factors such as the vesting period, strike price, and potential risks. You cannot exercise options until they are vested, and they typically expire between 5 to 10 years after the grant date. If you're laid off before vesting, you may lose unvested options. When exercising, be aware of the tax implications for both NSOs and ISOs, as they differ in how they are taxed upon exercise and sale of shares.
It's essential to evaluate your stock options' worth and consult with a financial advisor or professional when determining the best strategy for exercising your options. Keep in mind that options have little to no value unless the share price is greater than the exercise price, and exercising options with a decreasing price can result in a loss of both the money used to exercise the shares and any associated taxes.
Understanding the tax implications is essential for anyone involved with stock options, especially employees with ESOs:
Pilot provides bookkeeping, CFO, and tax services for literally thousands of startups and growing businesses. We've successfully processed over 10 million transactions for our customers and have unparalleled expertise when it comes to helping businesses succeed.
We're the largest startup-focused accounting firm in the United States, and we'd love to help you. To talk to an expert on our team and find out what Pilot can do for you, please click "Talk to an Expert" below, or email us at info@pilot.com.
Get the peace of mind that comes from partnering with our experienced finance team.