Most companies offer standard benefits to their employees, such as health insurance and retirement plans. However, some companies also offer employees stock options that allow them to purchase stock in the company after working for a predetermined amount of time. After this time passes, the stock options are fully vested and the employee can exercise them.
A stock option is a contract that allows the holder the option of purchasing a share of a certain stock for a predetermined price. The contract doesn't obligate the holder to exercise the option, however. If the holder decides to purchase stock, he must pay tax on the difference between the market value of the stock and the purchase price. After purchasing the stock, the owner can either hold it or resell it.
Stock options included in your employee contract aren't immediately active when you begin working. Instead, the options vest according to a schedule detailed in the contract. Some stock options vest annually, while others vest quarterly or monthly. For example, a contract may state that 5 percent of an employee's stock options will vest each quarter. In this case, an individual who works for three quarters would have 15 percent of his options vested.
Fully Vested Stock Options
If you have fully vested stock options, you can choose to purchase shares of the company's stock for the strike price included in the stock option agreement. You can typically purchase any number of shares up to the number of vested options you hold, or you may decide not to purchase any shares at all. You can exercise your vested stock options until their expiration date, which is typically 10 years after the options become fully vested.
Though most stock option contracts allow employees to exercise fully vested options even after leaving the company, some companies may require you to forfeit options you haven't exercised if you leave the company to work for a competitor. You can't typically transfer employee stock options to another individual, regardless of whether or not they are fully vested. However, some contracts allow employees to transfer vested stock options for estate planning purposes.
- business image by peter Hires Images from Fotolia.com