This year I had an unexpected and pleasant surprise at work. I was awarded stock options for 700 shares pricing in March. The options vest 33.3% per year over the next three years.
It is exciting to be awarded options. This ties my compensation to the company’s performance over the next three years. From the company perspective, it is better to have employee compensation tied to company performance, as employees may work harder to ensure the company is successful.
Here is how employee stock options work, using my situation as an example:
- First, I am notified that I will receive options. I was given the number of shares and the pricing date for the options.
- On the pricing date in March, my options are given a fixed value per share. This is tied to the market price on that date. The price is called a strike price.
- Every year for the next three years, a portion of those options become vested, or available for use.
- If the market value of my company stock is higher than the strike price on any date past the vesting date, I have the option to buy shares of the company stock at the strike price. If the price is higher than the strike price, I can sell immediately for the market price and keep the profit. If it is below the strike price, the option is “out of the money” and I will not exercise the option.
As you can see, the mechanics of options depend on the market price compared to the strike price. No one would ever exercise options “out of the money,” because they would have to pay for the stock at a price higher than the market price.
While employee options have similar mechanics to buying and selling options on the market, there are many differences. Do not use this as a guide to buy and sell options.
