The saying “A man with options is a man with power” makes sense when talking about life in general. But it also holds true when it comes to equity and stock options.
Many companies offer stock options to their employees. It’s one of the most popular types of employee equity compensation. This is because workers have the right to exercise stock options.
Exercising stock options is a confusing topic for the uninitiated. You’ll understand how important this process is if you have more information. So here’s an overview of what you need to learn about exercising stock options.
What is a Stock Option?
A stock option is a type of financial contract. It gives the holder the right to buy shares of a company’s stock. The shareholder can buy the stocks at a fixed price defined in their option grant. This is also called a grant price, exercise price, or strike price.
This privilege of buying a specific stock at an agreed price only happens within a set period. Stock options are a right. The shareholder is not obliged to buy the shares. A shareholder who chooses to buy these stocks is exercising their option.
What Exercising a Stock Option Entails
When shareholders exercise stock options, they buy the shares of the stock. This is always based on the option agreement. This can benefit the shareholder when the grant price is lower than the stock’s market value.
Let’s say a new employee receives a stock option as part of their compensation package. The grant price of the stock option is $100 a share. The price for every share of the company’s stock is $200. The employee then decides to exercise their stock option. They’ll buy the shares at the grant price. The employee can sell the stock certificate shares or hold them. If they decide to sell their share, it will be at the current price per share. This means they will make a profit of $100 per share.
Many companies include stock options in their compensation package. It’s an effective way to attract valuable employees. It also incentivizes them to work hard and ensure the company succeeds. Employees can’t hold on to their potential shares forever though. Stock options come with an expiry date. This is the last day the shareholder can exercise their stock options. They will lose it if they don’t take advantage of the offer.
3 Methods to Exercise Stock Options
Employees given stock options can exercise their options in several ways.
1. Exercise and Hold
This method means employees will use their money to buy shares. It’s a risky move and one that entails they pay cash. There’s no guarantee they can get their money back or make a profit. The investment is also tied up in their stock certificate shares until they’re sold. But there’s potential for a big payday if the shares end up worth a lot.
2. Exercise and Sell
A company can go public or offer a tender offer. They can let employees exercise stock options. They can sell their shares in a single transaction. Part of the money from the sale will cover the buying price and other applicable taxes. The rest of the proceeds will go to the employee or holder.
3. Exercise & Sell to Cover
When a company goes public or offers a tender deal employees can cash out their stock options. They will let the holder exercise their options. The employee can then sell enough of their shares to cover the buying price, fees, and taxes. It’s then up to them to decide what to do with the rest of their shares. They can opt to hold on to their remaining shares. They can also decide to sell everything.
The Best Transfer Agent Services is at Hand
Your company can achieve more with the help of Legacy Stock Transfer, Inc. We’re one of the premier stock transfer agencies in the country. We’re a family-owned and operated full-service stock transfer agency. Working with us will help improve your shareholder relationships. You can message us here or call us at 972-612-4120.