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What are stock options? Understanding how they work
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What are stock options?
How do stock options work?
What are the types of stock options?
- Incentive Stock Options (ISOs): These are typically offered to employees as part of their compensation package, especially in startups and established companies. Some restrictions apply to who can receive ISOs, and the total value of ISOs exercisable in any calendar year is capped.
- Non-Qualified Stock Options (NSOs or NQSOs): Unlike ISOs, these can be offered to employees, directors, contractors, and others involved with the company. NSOs don't have the same tax advantages as ISOs, but there's no waiting period, so you can exercise them whenever you want.
- Restricted Stock Units (RSUs): RSUs are another form of equity compensation. The company promises to give you actual shares of stock at a later date once certain conditions (usually time-based vesting or performance goals) are met. RSUs are granted to you outright and often come with fewer risks. However, they also typically come with fewer potential tax benefits.
- Employee Stock Purchase Plans (ESPPs): While not exactly stock options, ESPPs are worth mentioning. These plans allow employees to purchase company stock at a discount, usually through payroll deductions. The discount can be a substantial benefit, and ESPPs often come with tax advantages if you hold onto the shares for a certain period.
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What happens to stock options if you leave your job?
- If your stock options have already vested (meaning you've met the requirements to exercise them, such as staying with the company for a certain period), you typically have a window of time to exercise them after leaving your job. This window can vary but is often between 30 to 90 days after employment ends.
- If you leave your job before your stock options have fully vested, you typically forfeit any unvested options. However, some companies may have provisions for partial vesting or accelerated vesting in certain circumstances, such as termination without cause or a change in control of the company.
- In some cases, such as retirement, disability, or death, companies may have special provisions for treating stock options.
- If your company is acquired or merges with another company, the treatment of your stock options may be governed by the terms of the acquisition agreement.
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