When starting a new role with a new employer, it is possible that they will offer you some compensation in the form of stock options. These are shares in the company you work for that you will be able to sell at some point in the future (a common minimum hold period is three years).
While stock options were once considered a small footnote in most compensation packages, they are increasingly becoming the main value proposition offered by companies seeking talented and ambitious workers. Stock options might be dispensed free of charge to the employee, or they might be able to purchase them at a discounted rate.
Since stock options are often presented in lieu of additional cash or bonuses, it’s worth considering whether they are always worth it. Let’s take a closer look at when stock options from your employer are worth your time.
The rationale behind stock options
In theory, stock options exist to incentivize good performance, especially among executives. If a company is performing well, then it goes to follow that the value of that company’s stock will rise. If an employee has stock options, the value of these will rise in turn.
Therefore, employees with stock options have an incentive to deliver the best results for the company, since it has a direct impact on the value of their assets. This is why stock options have been an integral part of the corporate world for decades now.
Will they be worth anything?
When you are offered stock options as part of a compensation package, you might have the option to request a pay raise or a cash bonus instead. Alternatively, you might have the option to simply forego the stock options altogether if you think they are not worth the effort. In order to make the right decision, you need to consider realistically whether those stock options will be worth anything. There are some examples of stock options making employees very wealthy indeed.
While anyone can buy Tesla stock via an online stock broker, Tesla employees typically receive $20,000-$40,000 worth of free stocks within their first three years on the job. Given that the Tesla stock price has skyrocketed in the past five years, those earlier employees with stock options have made vast sums of money, once they were able to sell.
When can I cash out?
All stock options packages will have very strict conditions that determine when you are allowed to “cash-out” and sell the stock for cash. Most will have a minimum time period that you must hold onto the stocks for, which can range from a couple of years to ten years or more.
Meanwhile, some stock options expire as soon as you leave the company or are fired, meaning that you will never be able to make a profit from them. If your stock options have a long holding window and cannot be sold if you leave the company before that time is up, they might not be worth it.
More and more employees are being offered stock options, but not all options packages are created equal. Think carefully about whether your stock options offer is truly as good as your employer makes it sound.