When I was hired, I was granted 1,000 ISO stock options. I have vested 500 and have not exercised any because I don’t really understand the implications of exercising them. What happens to the money I spend on them? What is the potential gain? What are the risks?
In: Economics
A stock option lets you buy the stock at a fixed price below market rate.
If it’s a public company, you could then sell the stock and make the delta between your buy price and the market price of the stock. It’s basically extra compensation in a public company if the stock is stable or trending up.
If it’s a private company that hasn’t IPO’d or been acquired, you might wonder why they matter if you can’t exercise them. If you leave the company, you lose the options – but you keep any options you exercise.
There already also tax implications – if you have options that aren’t worth much now but you anticipate them to be a lot in the future, it can make sense to exercise and hold. If you sell within 2 years it’s a short term gain and taxed like regular income. If you hold longer than that, it’s taxed as long term at a lower rate.
In most cases you’ll want to buy them if the company is healthy (and if it isn’t, you probably want to find a new gig anyways).
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