Some employers provide employees with stock options as a benefit and incentive. Owning stock in a business makes an employee a part-owner, thus giving each employee who holds options a genuine reason to care about the success of the company. Employers in the 21st century are increasingly using stock options in rewards plans, according to CNN Money. Determining whether you can cash employee stock options comes down to considerations such as the specifics of your option plan.
Cashing Employee Stock Options
Simply put: Yes, you can cash employee stock options. However, understand that you must purchase the options before selling them. When employers provide stock options, they give employees the option of purchasing a certain number of shares in the company, not the actual shares. If you “exercise” your employee stock option, you purchase your optioned shares from the company. Once you own the shares, you can do as you please with them, including selling them.
Stock Option Terms
No laws monitor the exercising or selling of employee stock options. However, employers that provide stock options usually place terms on them. Option terms impose a time limit on reserving employee stock options for you. This means that if you don’t purchase your options before a certain date -- the expiration of the term -- they lapse and the company regains control of them. Options terms may also impose a waiting period before you can exercise and sell the stocks without penalty. Before purchasing and selling options, always check their terms and ensure that you wouldn’t incur penalties by exercising them and selling the shares.
When to Cash Employee Stock Options
According to Carol Curtis, author of “Pay Me in Stock Options,” selling options too soon is the biggest mistake of those with employee stock options. Curtis writes that employees should wait as long as possible -- usually, to the end of the options term -- before cashing options. Selling options straightaway often proves very costly and can result in various taxes and fees.
However, employees should assess the value of a company before deciding to wait to the last minute to sell shares. If your employer is not posting regular profits, exercising options and selling shares at the end of your term might actually result in a loss.
Types of Employee Stock Options
Two types of stock options exist: non-qualified stock options, or NQs, and incentive stock options, or ISOs. Although ISOs provide a number of tax benefits, these types of stocks generally go only to executive employees.
The government taxes NQs immediately as a form of income when you exercise them. Taxes on NQs can greatly impact the profitability of exercising and selling options. Though you can exercise and sell them, this might not prove as lucrative as you expect.
Methods of Selling Employee Stock Options
Three methods of selling options exist. Your financial situation and stock options deal directly affect your ideal method of sale.
"Cashless exercise and immediate sale" allows you to sell your shares immediately and use the profit from the sale to cover all costs associated with exercising the share. You receive only profit left over after paying for exercising fees and taxes. "Cashless exercising and holding" stock allows you to sell just enough shares to cover the cost of purchasing your options while retaining the rest for later sale. "Cash exercise" means you buy your options outright with cash and do as you please with them.
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