12 Important Considerations an Employee Should Look Out for Relating to Stock Options

by Nancy Jemes Blogger

A stock option is an opportunity for the employees of a company to buy shares at a specified price. A company grants options to attract and retain talented employees because it can help motivate more dedication from employees.

Stock option is a cost-effective employee benefit plan and generally, a company wants to adopt a plan that gives them maximum flexibility. While for an employee, a stock option can bring huge financial gains in the future. But, before jumping the ship, they must assess all the factors, and consider some key points thoroughly, as stated below:

Total Number of Shares
For issuing the stock option plan, there is a certain criteria related to reserving the maximum number of shares that can be granted. The number basically depends on what the company believes is appropriate.
Number of Options Granted To an Employee
There is no any principle for a company to grant stock option to an employee because it is accessible and the company is able to set internal guidelines by job position of the employee in their company.
Consideration
This plan gives the maximum flexibility to the board of directors to determine how the exercise price can be paid and also for subject to compliance with applicable corporate law.
Shareholder Approval
It is important to have a shareholder in a company to approve the plan for securities law reason and to cement the ability to offer tax-advantaged incentive stock options.
Right to Terminate Employment
The plan should openly state that the grant option doesn’t guarantee an employee a continued relationship with the company to prevent giving employees an implied promise of employment.
Financial Reports
The plan requires periodic financial information and reports are delivered to option holders for security law reasons.
Vesting
There are many companies that provide a vesting schedule. In this schedule, employee or advisor has to wait for a certain time before they are able to exercise their option right.
Exercise Price
The value of stock is set to the fair market value of stock at the time when the stock is granted. In case, If the value of stock goes up then the options will become valuable because the employee has the right to buy the stock at a low price.
Time to Exercise
The stock option agreement basically sets a time for the employee to exercise the option. There can be an agreement when an employee only has 30-90 days to exercise an option after their employment with the company has terminated.
Securities Law Compliance
The underlying shares and option’s issuance requires to be in compliance with the federal and state safeties law.
409A Valuation
The company should make a fair market value’s determination of their common stock setting the exercise price of the option, pursuant to Section 409A of the Internal Revenue Code.
Cash is Needed for the Exercise
For exercising any option, the option holder needs to pay cash from pocket for the exercise.