And "rumored" means that whether or not the company will actually go public is still subject to some speculation. What makes those two words so dangerous? "Startup" implies that the employer is a new or fairly new company. The person asking the question describes the employer he or she's considering as a "well-known privately held startup rumored to go public in the next year/year-and-a-half." There are two red flags in that assessment: startup and rumored. To keep employees with the company longer (the main reason behind periodic vesting).As a performance incentive for existing employees (a higher stock price results in higher option payouts).As an incentive to attract new employees.To preserve cash - options don't require out-of-pocket cash, like salaries do.
There are several reasons why employers offer stock options:
Why an employer would want to offer stock options If the options expire before that price is reached, they will become worthless. The options have no value unless the stock climbs to over $50. But the value of the company's stock has fallen to $40 per share. The employee exercises the options, and earns an immediate $5,000 profit - 200 shares at a gain of $25 per share.Īfter two years with the company, the employee is vested in another 200 shares. After one year, the employee is vested in 200 shares, and the share price has climbed to $75. And naturally that can never be known at the time the options are granted.įor example, an employer might grant an employee the option to purchase 1,000 shares of stock at $50 per share, which is referred to as the strike price, or exercise price. The market value of the stock at the time the options become vested determine the value of the options. Vesting is a strategy that employers use to keep employees with the company for longer periods of time. Vesting might occur over, say, five years.
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There is also a vesting period, after which the employee will have full ownership over the options. If the options are not exercised by those dates, the options will expire and become worthless. Account icon An icon in the shape of a person's head and shoulders.
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