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5 Things to know when you Receive Stock Options or Stock Awards

If you company has offered you stock options or other stock awards, here are five things you should know:

1.  Lower Salary Now

Stock options give you equity, or an ownership share, in the company. Usually if a company offers stock options, it’s because your base salary will be lower than the average for your position elsewhere in that industry. Whether that is a good deal for you in the moment depends on your personal situation, the amount of stock options offered and the projected growth of the company.

If you receive stock options, then you will need the cash to purchase the shares of stock.  If you don’t anticipate that you will have the extra cash, then you may want to ask if the stock option plan allows a cashless exercise.  In startup companies, you will want to carefully review the price per share of the option award to make sure it is in line with the value of the company.  Otherwise, your options may not have enough value for you to take a lower salary.

2.  Potential for More Money Later

In general, if the company is growing, your stock options will become valuable in the future.  On the flip side, of course, if the business fails or slows, your options will have little or no value. If the company does well and then sells, you could make a good amount. Yes, that’s a lot of “ifs,” and a lot to think about.

3.  Taxes on Various Awards

The tax treatment of executive stock compensation is complex.  If you receive a stock award from your employer, you will generally owe tax on the fair market value of that stock in the year it is received.  This is often undesirable for tax planning purposes because you do not receive any cash to pay the extra taxes owed on the stock you received.

Stock options will lock in the price of the stock on the date the award was granted so you may purchase the stock later at the lower price, even if the company has appreciated in value.  If the stock options are “qualified stock options” you will not owe tax on the difference between the price you paid (the value when the award was received) and the value on the date of purchase until you sell.

If neither of these options work for you, then consider asking your employer about a phantom stock plan or a profits interest plan.  These options generally do not require the employee to tender a purchase price or pay tax on the date you receive the award.

4.  Vesting Schedule

One of the most important things you should know is when and how your award will vest.  Vesting is tied to the date on which you will have access to your stock award. Usually, a company wants you to stick around for a few years before you can begin exercising your stock award. Many companies offer a certain percentage of them at that point, perhaps 25%, with the rest vesting at a later date, sometimes another specific percentage per year, often up until four years. This set-up is commonly called “four years vesting with a one-year cliff.”  You should consider asking your employer to accelerate your vesting if certain events occur.  This means you will not have to wait the entire period for your award to vest.  Common events to negotiate with your employer are: (i) a sale or merger of the company; or (ii) achievement of certain sales goals.

It’s critical to understand what happens to your award and vesting schedule when you leave the company.  In some cases, you may lose all your award.  Many employees will attempt to negotiate to retain all or a portion of the award if they are fired “without cause” or leave with “good cause.”  The definitions of those terms are also the subject of careful negotiation and drafting.

5.  The Importance of Details

When you receive your award documents you will want to carefully review them.  For stock options, your contract should say something more than simply a percentage of the company because there are a lot of variables that will determine what your options are worth.

You would want to know, for instance, whether your stock options will become diluted should the company offer stock to many other employees and investors.  You also want performance bonuses and requirements spelled out in excruciating detail.

If you’re considering a job offer that includes stock options or other incentive compensation, the advice of an experienced attorney is invaluable.  The language in the award documents is also very highly detailed and difficult to really understand without the assistance of an experienced attorney.

Call BBU at 720-439-2530 or send us a message today to talk and we would be happy to assist you.


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