Stock Options: 3 Tips from Schar Donald
Guest Post From Schar Donald - Financial Enthusiast at Money Mindset Matters.
I have worked in the tech industry for almost 20 years and have seen a plethora of benefits offered to entice employees. One major benefit that has been discussed heavily over the last few years is stock options.
Startups tend to offer stock options to employees when they are starting and unable to provide a traditional retirement plan such as a 401k. In my conversations with job seekers who are turning to the tech world for better higher-paying jobs, I have been asked...
“What advice would you give around stock options for employees?”
So here are a few things to keep in mind if stock options are a part of your job offer.
1 - Vesting
Stock options are generally given to employees with conditional vesting. Vesting simply put is how much of that stock option you own vs how much the company owns.
If you are 100% Vested you fully own that stock option. If you are only 25% vested you only own 25%. Many companies will vest stock options gradually as you stay on longer.
Sometimes it is at a rate of 25% per year employed. You want to read the fine print and confirm that before signing a job offer.
Here is a huge hint:
You will most likely not come across an offer that immediately vests stock options at 100%. Anything lower than 25% is uncommon.
2 - Value
Outright ask what is the value of the stock option you are receiving and determine for yourself if the value is right. You may want to also look up what values there are of similar companies in terms of their current and future stock prices. You can do research like this on sites such as Yahoo finance.
If a company has a $.50 stock option and does not have a 401 K plan, you may want to take some time to review the offer for other benefits if the work on that particular job is right for you.
Most stock values will be between $1 and $5 for small companies. Larger companies with greater value will have larger values. A company's stock value should be determined by an independent auditor and that auditor's name should appear on the stock options paperwork.
3 - Venture Capital
Here is the best part about owning stock options in any company, but specifically a private company. Private companies seek capital from other investors such as venture capital companies. These companies will purchase a portion of the company based on the future value of the company.
When they do, you could potentially receive a payout. However, this also means that although you are 100% vested you will have to sell a portion or all of your stock options. When you do you will receive a payout from your employer as an investor and not an employee.
No taxes will be taken out and you will be left with the tax burden of that sale. You want to consult with a tax expert and a financial advisor at that point. A tax expert who can tell you what to expect on April 15th and a financial advisor who can either show you how to roll the investment into a retirement fund or some other income-preserving asset.
Just a few more things about the selling of stock options in a venture capital situation
The employer will report this income on a document known as K1.
You will receive this as well as your W2 for the year.
The IRS also receives the K1.
You cannot hide your investment income from the Federal Government so do talk to a tax expert once the words “Sale” come out of your company leaders' mouths.
A final word about stock options
Should you receive stock options in a job offer remember:
Stock options should not be accepted as income.
Make sure you keep a copy of your stock option certificates both digital and physical copies.
Check-in on the value of your stock options at least once a year when your company sends out its annual report which should include your company value.
Stock options are a great enhancement to any job offer but should not be the only thing you look at when you receive a job offer.
Know whether or not the company offers stock options and don’t just expect it. Ask!
By day, Schar Donald is a Certified Scrum Master & Product Owner in the tech world but off the clock she offers helpful tips and trainings focused on money matters.
"Use your career to jumpstart your lifestyle. If you want to glow up, you have to have your bank account grow up. We help you with your money mindset. We also teach you ways to create abundance via day trading."