Employee Communication and Education: Got Company Stock Options? Here's How They Work

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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.

he 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!