How incentive stock options work. Incentive stock options (ISOs) allow you to buy company stock in the future at a fixed price equal to or greater than the stock's fair market value on the grant date. If the stock appreciates in value, you will be able to buy shares at a price below what they are then trading. However, there are complex tax rules.

How incentive stock options work

Incentive Stock Options and Non Qualified Options

How incentive stock options work. Incentive stock options (ISOs) allow you to buy company stock in the future at a fixed price equal to or greater than the stock's fair market value on the grant date. If the stock appreciates in value, you will be able to buy shares at a price below what they are then trading. However, there are complex tax rules.

How incentive stock options work


December Best Post contest! How do incentive stock options work? April 20, 7: Starting a new job, received some incentive stock options.

Now how on earth does this work? What are my next steps in this game? Next steps don't really matter at this point. You just sign the document they give you, and you may want to file something with the IRS to pay taxes on the shares now instead of when the shares vest. This is called an 83 b election and you should be able to ask your company about whether it's advisable and how to do it. When the options become exercisable, you can buy shares of the company at the exercise price.

The options aren't exercisable until they vest. None of the options will be vested until you've been at the company for a year, so if you leave before the first year, you lose them.

This is the one-year cliff. After the first year, additional shares vest monthly. After you've been at the company for a year, of the options become exercisable. For each additional month you're there, an additional 20 give or take options become exercisable until all the options vest.

There should be a formula they can give you that determines "fair market value". Basically the cash you put in your pocket will be the difference between the share price and the "fair market value" price at the time you exercise the options, but you can't exercise any options that have not "vested".

Vested is jargon for "Its now yours" posted by JPD at 7: If your company's stock goes under, the options are "underwater" and not worth anything. If you leave the company, you typically forfeit the options. I think that's all the info I need for now. In addition to the above, incentive stock options have different tax rules from nonqualified stock options.

Make sure you know which type you have when you do your taxes, as there is an actual downside for selling ISOs less than a year after you buy the stock.

The one thing you need to keep in mind is that when most people get stock options through work, these are non-qualifying options, and the rules and tax implications are significantly different in those cases.

There are 2 other options keep in mind I'm not a tax lawyer, financial planner, or accountant and you need to double- and triple-check all of this: The money you get here will be taxed at regular rates. Another one is to wait a year and a day after vesting to exercise and a year and a day after exercising to sell.

The tax rates you will pay will be much lower if I remember correctly, you only pay the long-term capital gains tax on the appreciation during the period you hold the stocks. The downside is that the value of the shares minus exercise price will count towards the alternative minimum tax AMT. This can be a big deal. So one other thing I forgot to mention above: I don't want to put words in their mouths, but I think chickenmagazine, JPD, and elmay would agree: You may want to use your next AskMe to find out who in your area is a good person to talk to about this and how much you can expect to spend on a consultation.

See this recent thread for more on the AMT. Get a copy of Consider Your Options , it's a truly fantastic resource for understanding employee stock options. If you want to be able to meaningfully evaluate the value of your stock options, you need to understand just how much of the company you're getting. Generally you should think about "percentage of the company" rather than "number of options".

There are other factors to consider too, when valuing your options, such as the fact that VCs will get priority when the company is sold up this is called a "liquidation preference" , so your options may be totally worthless even if the company sells for a per-share price that would appear to make you money. Is the company publicly traded? It makes a huge difference in how the options effectively work whether there is a liquid market for the company stock or not. The other downside is that you actually need that cash available, and will tie it up for a year.

This can be quite a lot of money for shares, or a significant portion thereof. In this case, shares one quarter vests each year. Which can still be a significant amount, but in my experience and what I've heard generally is that ISO strike prices tend to be fairly low. This thread is closed to new comments.


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