How many of you have ever received stock option grants as part of your Total Compensation Package with your company? I’ve been getting documents (that reference my options) every Christmas from the company I work for and I would simply file away the large manila folder labeled Options into my desk drawer. It wasn’t until recently that I unearthed these documents and caught up with this information that I’d been missing all these years.
For those of you who get company stock options, pat yourself on the back. Your employer really appreciates the work you do and the effort you put forth in order to make them more successful. They appreciate this so much that they are actually giving you some ownership in the company by giving you an opportunity to buy shares of common stock in the company, usually at a reduced price. They’re also giving you the ability to reap the benefits of your company’s success.
Image from thetalentbuzz.com
The Basics of Company Stock Options
Let’s take a look at how this works:
Let’s take for example a hypothetical company I’ll call “Anderson Paperclips”. It has ten employees who work super hard to make the best paperclips on the planet. The owner of the company wants to reward his employees, but instead of giving them a bonus, which most of them will spend and forget about five minutes later, the owner decides to give them something more substantial. He decides to give them a stake in the company they are making great and the opportunity to directly influence just how much that monetary reward can be. But, instead of giving them shares of company stock, he gives his employees stock options.
Stock options are like contracts for the right to buy common stock in a company sometime in the future at a price that is set today. For instance, the employee stock options (another name for company stock options) I received last year allow me to purchase 500 shares of common stock with my company at $12.51 per share. The only catch is that I have to wait until the options mature before I can exercise my right to purchase. Hence the term often used to describe these things in the vernacular: golden handcuffs. It’s certainly one way to encourage people to stay employed at their place of work.
In my company’s case, the vesting or maturing period is 7 years. So, I have 7 years to do whatever I can to make my company as much money as possible before I exercise my options. The same (or something similar) would go for the employees of Anderson Paperclips.
When you exercise your options, you execute your right to buy the stock at the listed price on your contract. You can do this at any time after your award vests. I (and I imagine, most people) prefer to exercise these options and then sell them immediately, pocketing the difference between the exercise price and the current market price of the common stock, minus brokerage fees — hence the drive to make my company as profitable as possible. Others hold on to these options much like they would CDs or other savings products or keep them in their portfolios as a way to save for retirement.
The Benefits of Company Stock Options
This type of compensation is extremely good for the company that issues them. The reason is twofold. One, the money that they dish out to the employees is considered deferred compensation because the employee doesn’t get to utilize the award for several years after receiving it, thereby keeping more cash in the bank for the company. Also, the company benefits from having highly motivated employees who understand that their award’s value is purely based on the company’s performance, which is directly tied to their performance.
It’s kind of like getting free money from the company and who doesn’t like getting free money? If you are fortunate enough to work for a company that issues stock options, don’t slide those innocuous little manila envelopes into your desk drawer, scratch your head and whine about why a Christmas bonus would be better. Appreciate the fact that your employer believes in you and wants you to share in the success of the company you are helping to build. If you don’t get options, bring it up to senior management to see if this can be added to your compensation program.
A Word from SVB: Silicon Valley is known for handing out stock options, often in lieu of higher salaries. At one point (during the dot com era), it was fairly common — even expected — for employers to offer company equity as a form of compensation, with some startups offering employment based solely on “equity only” compensation. Definitely a sign of those times. In fact, at one point, I applied for a job with this kind of compensation package (yep, no real salary, just equity). Thankfully, I was rejected for the position as the startup in question imploded as part of the dot com bust. Learned my lesson here, and I’ll leave you with the advice to avoid “equity only” employment offers if you’re ever “lucky” enough to encounter them!
Copyright © 2010 The Digerati Life. All Rights Reserved.