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
So the options give you the option (hence the name) to purchase stock at some point in or period of time at a set price no matter what the current stock price is, once they’ve vested.
So if you have vested options to purchase 500 shares, at say $50 per share, and the stock price is at $100, you can purchase the shares for $25,000 and immediately have $50,000 worth of stock that you can sell or keep.
Keep in mind that there are tax considerations associated with exercising options that aren’t obvious so I highly recommend speaking with your tax advisor before making any decisions about what to do.
For your specific questions:
The money goes to your employer, and they hopefully give you more valuable shares in return.
The immediate potential gain is the difference between the current stock price and the exercise price of the options. The options can be held until their expiration, though this gain may change over that time.
The risks are changes to the stock price before or after exercising. There are also some tax considerations (taxes are due when you sell things and exercising is generally considered similar to a sale).
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