Employee stock options are like golden tickets handed out by companies to their crew. These options let employees snag company shares at a special price, AKA the strike price. The longer you stick around, the more golden tickets you collect.
But what if an employee wants to cash out their stock options? Can they do it, or are they stuck holding them like a hot potato until exercise time?
The short answer? Absolutely, employees can cash out their stock options. But hold your horses—there are some key factors to mull over first.
Vesting Period
First things first, you’ve got to get the lowdown on your stock options’ vesting period. Think of vesting as the timer on your microwave, counting down until you can finally dig into those company shares. Most firms cook up a vesting schedule of 3-5 years, so you’ll need to be patient and wait for the ding before you can feast on those options.
If an employee tries to cash out their stock options before the vesting period, they might as well be trying to sell a cake that’s still in the oven. The options aren’t fully baked yet, so exercising or selling them is off the table.
Early Exercise Options
Some companies offer employees the option to exercise their stock options early. This means an employee can flex their options muscles before they’re fully vested, usually at a bargain strike price. Early exercise options let employees ride the stock price wave before the vesting clock runs out.
But, early exercising isn’t all sunshine and rainbows. If you jump ship before your options fully vest, you might kiss those unvested options goodbye and sell them back to the company for a bargain. So, before you leap into early exercising, make sure you’ve weighed your options—or you might end up with a workout you didn’t sign up for. It’s worth businesses using solutions such as Astrella to manage your cap table, employee stock options, and things of this nature.
Tax Implications
Cashing out stock options? Don’t forget the tax man. When you exercise your stock options, you’re in for a fun rendezvous with ordinary income tax on the difference between the strike price and the current market value of those shiny shares.
Here’s a fun fact: if an employee holds onto their exercised shares for a year before selling, they might snag a lower tax rate on the capital gains. But don’t get too excited—this isn’t a guaranteed ticket to a tax haven. It all depends on your unique situation and the ever-mysterious tax laws.
Before diving into stock options, it’s wise to chat with a tax pro—better safe than tax-sorry.
Alternative Options
If an employee can’t cash out their stock options because of vesting periods or other hurdles, fear not—there are still fun alternatives. Some companies let you sell back unvested options at a bargain price, while others might swap your options for cash or sweet perks.
Employees might want to hang onto their options and wait for the company’s stock price to rise. After all, patience could lead to a bigger payday when they finally cash in those golden tickets.
