Howdy Ags,
I just received a job offer from a company in which an option to invest in stock is part of the offer.
I've been offered the option to purchase XX thousand shares over the course of 4 years. The grant will be split into 48 equal allotments and will vest monthly. The stock granted is common stock.
I have a few questions:
Would the amount I pay for my grant each month come before or after taxes?
Is it common for small companies to give a grant which would cost the equivalent of one-half my monthly net salary?
Would YOU accept a job where your stock options would cost one-half your monthly salary?

A bit more info: I have a wife, a 2 year old requiring daycare, and we are starting on child 2. The job is in pharma.

Thanks for your advice!

Are you being vested in stock options?

Most my options, I excersize and get the money after taxes. I have yet to buy and hold a stock from my company.

If you are new to the idea of stock options I would point out that they are a very good thing in a small company like this that has a lot of potential upside. The fact that your shares vesting monthly would "cost" 1/2 your monthly salary (if bought outright at the strike price)is a good thing assuming it means the number of shares being offered is high.

In terms of having to cover the costs for exercising the option, you won't ever really buy the options in a traditional sense so don't worry about out of pocket funds to cover. The company founders/President types might actually be exercising their options and then holding for the benefits of captial gains treatment on the spread but most employess don't have that ability (ie, it is neither feasible nor wise for you to come out of pocket thousands of dollars every month in hopes of bigger payout down the road). Instead you'll wait until the spread in strike price and fair market price makes it worthwhile for you to exercise, and then you can do a cashless exercise - the company will have something already set up with a broker to make it painless. As an example, lets say their offer gives you the option to buy 4800 shares at $20/share(with 100 vesting every month over 48 months). You won't actually buy that $2k worth of stock each month. Instead you'll plug along and at some in the near future (say 36 months in), your company will have a big inflection in value and your stock price will go up to $50/share. At that point you can do a cashless exercise buying your 3600 vested shares at $20/share and instantaneously selling at $50/share. In that scenario you have made $108,00 which will be treated as ordinary income.

Hope that helps. Feel free to PM if you want to discuss.

Thanks Scott! I sent a couple of PM's your way.
It's all very confusing and you made it very easy for a scientist to understand.

I'll be honest, I'm confused as to what exactly we're talking about here.

Would you mind filling in some details on the offer?

The way I'm reading it, it sounds like you're offered the chance to buy XX thousand shares. Since no details have been provided, I'll throw in some numbers.

Let's say it is 48,000 shares. The current price is $2 share and it will be split into 48 installments (1,000 shares/month or $2,000/month).

What is the price you can buy the shares at? Today's price? Some percentage of today's price (i.e. 80%)? Is that price locked in?

What is the incentive to lock into a 4 year purchase plan for a public stock? What happens if the price goes down (or up)?

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Is it common for small companies to give a grant which would cost the equivalent of one-half my monthly net salary?

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I don't think so. This sounds awfully shady and like they are trying to minimize their expenses (since half of your pay will find its way back into their account). (???)

quote:

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Would YOU accept a job where your stock options would cost one-half your monthly salary?

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No way. As it is, you're already investing a lot of your personal time as an employee of that company. Putting such a high percentage of your assets back into the company leaves you no diversification.


Personally, I despise compensation tied to PUBLIC stock. PUBLIC stocks are swayed and manipulated by so many factors unrelated to the company itself. I have sooo many friends in the oil/gas industry that went to work for public companies due to the "options" and many of those options are completely worthless due to the stock price. Pay me in cash, and if I want to spend money on "options" then that's my choice. But being dependent on your company's performance (in the eye of the public's opinion of it) just doesn't set well with me.

Sounds like it is just regular options. They could be worth nothing or could be worth a ton down the line. Options for more mature companies not as enticing as pre-IPO.

Ok guys, it's just regular options and works the way Scott detailed.
Sorry for the confusion. My base pay is not affected. When I would like to exercise, I could do a cashless exchange.
Thanks to all!

just remember that even if your exercise is cashless, you will still be taxed on the difference between the FMV and exercise price. That will show up in your w-2.

arson keg - obviously stock options are not a good compensation tool for you. Sure there is a chance they are worthless. Especially so in a company that is stagnant or doesn't have an optimistic future. But options can be a powerful benefit with the right company.

For the OP - as said already, you will more than likely use a cashless exercise when you choose to exercise. You won't write any checks to buy the stock unless you choose to hold the shares. That is typically an unattractive thing to do because:

a. you have to pay for the shares
b. you take the W2 hit on the difference in price between the option price and the market price when you exercise
c. you take on risk that the shares you hold decline in value

Monthly vesting is unusual in my experience, but it is a good thing because your shares effectively vest more often. I doubt you exercise anywhere near that often.

Keep in mind you may be subject to trading windows. You may only be able to exercise for a few weeks per quarter, and almost certainly not during the quiet period before earnings are announced.

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What is the price you can buy the shares at? Today's price? Some percentage of today's price (i.e. 80%)? Is that price locked in?

What is the incentive to lock into a 4 year purchase plan for a public stock? What happens if the price goes down (or up)?

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Normally the "strike price" for options is set the day the shares are granted at the fair market value that day. I do not think it is legal for a company to grant options at a discounted price.

Options are not a stock purchase plan. They are used as a type of compensation to reward you with something tied to stock price. Options do not stay with you if you leave a company - at most you are likely to get 90 days to exercise vested options. Unvested options go away.

[This message has been edited by SpicewoodAg (edited 3/26/2014 10:51a).]

the way the OP described it didn't make any sense

OP - I assume your company is actually a public company today, not pre-IPO. Is that true?

OP here. Company is not a start up.

Let's just let this one die guys. My question has been answered and I appreciate everyone's comments.