What is Stock Option Vesting and Its Working Procedure?

Employee stock option plan gives the right to buy a specific number of shares at a stated price, which is known as grant or exercise price, within a specified number of years. Some stock option plans come with a vesting date. A person cannot exercise the stock options before the vesting period or after the expiration date so there are chances that your options can become valueless when not exercised properly.

In simple words, vesting is a practice of earning stock options. Individual works hard for many years for stock option vesting and when the time comes right they must be able to exercise their options with a right approach and within the time. There are times when you’re very close to your dream but you have a lack of finance to exercise the stock options. It is wise to find the financial aid as well as look for consultation to arrange funds for exercising stock options.

The vesting period is the time before shares of the stock option plan are entirely owned by an employee. The employee cannot buy, sell or handover the stock options to any third party during the vesting period. Vesting is the procedure by which an employee is qualified for a stock option plan and is entitled to the advantage of ownership. 

Once vesting happens, the value of the stock option plan cannot be revoked. This eventually helps to motivate the employees and retain them in the company for a longer period of time. Granting stock options is one of the effective ways to attract talented resources, a strategy mostly followed by venture-backed startups in today’s times.

Stock option packages act as additional compensation or a portion of remuneration for employees. Many startups and large enterprises are using this process to retain brilliant professionals for a longer run in their organization. This offers an amazing option for employees by exercising and eventually selling their options at a greater value. However, it is not as simple as it sounds. There are many factors related to employee stock options such as exercise price and vesting, and the value of the grant price and exercise price, along with associated taxes, which must be taken into consideration to make the right move.

No matter what the reason is, allowing stock options to expire without exercising is not a great decision as you can miss out on the possibility of earning some huge financial returns. If you’re not familiar with the stock option vesting period and when to exercise stock, then it is wise to go through your stock option agreement fully, and approach an expert. In case if you cannot afford to take a financial risk personally, you can get funds to exercise your stock options and cover associated taxes from a wealth and equity management firm.

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