Building Revenue from the Inside Out
Pitching stock options as rewards or compensation was once reserved for the upper-echelon of the workforce. However, since its inception in the early 70's, offering stock options has become a bargaining tool for companies to attract, retain, and motivate promising employees across the board-upper management and base-level workers alike. It also invites potential employees to develop common interests with the company and other shareholders, which in turn can promote employee morale, solidarity, and economic growth. Thus, understanding some of the basic nuances of owning and exercising these options can empower employees with a sharp wealth-building tool to help carve out their financial futures.
So What's the Fuss About
Google is perhaps the highest-profile corporate example of success-turning thousands of original employees into multi-millionaires, including the in-house masseurs (according to NerdWallet, a personal finance information service, 2013). They, like many other companies, have harnessed the cooperation of their employees in growing their business. Essentially, offering a stock option is a contract between a company and its employee to purchase company stock, usually a set amount of shares at a fixed rate for a fixed time. Strategic exercising (buying or selling) of options helps employees take an active role in expanding the company while achieving powerful personal financial leverage. When properly executed, they stand to make monumental profits, independent of what the market does. Furthermore, trends indicate options produce greater income than many mutual funds according to Safehaven.com; a financial portal. That's intriguing! Employees who have a better grip on the nature and timing of exercising options, and the incurred taxation, have an upper-hand.
The Basics:
While it is wise to seek the advice of a financial advisor to understand the appropriate scope, here are some basics to consider when opting into investing in shares being offered by your employer. Namely, employee stock options do differ from those sold on the open exchanges-especially in terms of "transferability" and "vesting periods," or the process by which employees accrue rights over time to employer-granted assets. In general, an employee with stock options has the right, not obligation, to exercise company stock in accord with company agreement. When an employee initially buys a number of company shares at the "grant" price (or market price at the time), the aim is to "cash in" at the end of the fixed term, assuming the stock is sold appropriately and share prices have gone up over time. There are two types of options: NSO or "non-qualified stock options," typically offered to non-executive employees and outside consultants; and ISO or "incentive stock options," which receive favorable tax treatment and are typically reserved for key employees and executives. Each type must adhere to the employer-agreement and any special terms outlined in the Internal Revenue Code. Each type stipulates different holding periods and respective tax rates. Timing a sale of shares is critical in generating the maximum amount of money on a contract. Likewise, observing proper holding periods and waiting until a sale qualifies for lesser long-term capital gains tax can save an employee hundreds, even thousands of dollars in penalties.
Considerations:
Understanding vesting schedules, taxation, and other short and long-term implications can certainly be complex! Furthermore, both the company and employees have their parts to play. It is a company's responsibility to define, educate, and train its employees on the kind of ownership culture and plans it wants to promote. For instance, will they encourage true employee participation, or simply to provide perks for "key" workers? Similarly, employees should also exercise due diligence in exacting an options plan and avoiding pitfalls. Notably, it is wise to be diversified so as not to become too invested or concentrated in a company's stock, or to risk investing in worthless stock. Forbes.com states, "Most advisors recommend that no more than 20% of a company's stock should be represented in one's overall investment portfolio". Again, it is always wise to seek the advice of your personal investment strategist prior to making any decisions regarding investing in any stock options.
Bottom Line: For a lot of people who don't consider themselves savvy investors, the notion of financial planning can be daunting. However, with the right education and guidance, you can secure a solid portfolio and therefore financial security and freedom. Whether you're looking to preserve your income, provide for a budding family, increase your net worth, or to set yourself up for early retirement, it behooves you to have a diverse financial plan. If advised, take advantage of any employer-granted assets, like stock options as part of your financial planning. Developing your hand at exercising these options can help you become an active partner in furthering your company's future growth-better rooted in similar interests-while providing for your own needs.
