Stock Options

A Stock Option Plan is an arrangement that enables employees to purchase company stock at a future date, but at today's price. For example, an employee might be given 100 options to purchase shares that are currently priced at $10. He may have to wait three years or so (the vesting period) to exercise his right to purchase. At that time or thereafter (up to the expiration date - commonly 10 years), he can choose to purchase the shares. Suppose he waits until the shares are valued at $18. He would write a check to the company for $1,000 and instantly own shares worth $1,800. Depending on the nature of the shares, he may or may not be taxed on the $800 value. Should he then hold the shares for at least another year before selling them he should expect capital gain taxation on any growth beyond the $1,800 value. Stock option plans are most commonly found in public companies or in private companies on an IPO track. Private companies should consider the liquidity needs and dilution impact of a stock option plan before implementing one.