Stock options can be used to both protect and create profits for typical investors. For example during the dot.com bubble of the late 1990s one of the owners of a major internet company purchased put options to protect against a stock value decline. He kept these positions in place. After the collapse he made over a billion dollars by exercising his puts and purchased an NBA team.

In contrast to purchasing exchange traded stock options employees can acquire employee stock options offered by their company. These options provide the ability to purchase stock can be acquired before or after the stock has been taken public and can be quite valuable because stock can be purchased often at a discounted price compared to current market prices. For example one Microsoft employee\’s net worth exceeded a billion dollars a few years ago simply from acquiring as many employee stock options as possible and exercising those options.

The following lists general differences between employee stock options and standard exchange traded stock options:

1. Category: Exercise Price

Employee Stock Option (ESO):

– Non-standard.

– Usually current price of stock when issued.

– Grant price may be lowest point of 60 days.

Standard Call Option:

– Price and or market set by seller.

– Expires on specific date.

2. Category: Quantity

Employee Stock Option (ESO):

– Determined by employer employee contract.

Standard Call Option:

– Sold in round lots of 100.

3. Category: Vesting

Employee Stock Option (ESO):

– Initially X number of shares is granted an employee.

– Employee may get all the shares at once (“cliff vesting”) or may get all shares staggered, in equal or varying amounts, over time (“graded vesting”).

Standard Call Option:

– None required.

4. Category: Events

Employee Stock Option (ESO):

– Some events may need to occur for options to be available.

– Events may include stock reaching X price, a public offering, or X percent profit earned, or performance goals.

Standard Call Option:

– For call option to be valuable the underlying stock must reach or exceed a set stock price called a “strike price.”

5. Category: Duration

Employee Stock Option (ESO):

– Maturity is determined by the employee-employer contract.

– It is not uncommon for options to mature from five years and beyond.

– Must be exercised or they expire on a predetermined date.

Standard Call Option:

– Standard call options have expiration dates after which the option has no value.

6. Category: Non-Transferable

Employee Stock Option (ESO):

– Usually not transferable.

Standard Call Option:

– May be sold at any time before expiration date.

7. Category: Over-the-Counter

Employee Stock Option (ESO):

– Not sold over-the-counter.

– Contractual agreement between employee and employer.

– Employee and employer settle contract between them.

Standard Call Option:

– May be sold at any time before expiration date.

8. Category: Tax Issues

Employee Stock Option (ESO):

– Tax advantaged compared to standard exchange traded options.

Standard Call Option:

– No tax advantages.

Types of Employee Stock Options in the United States

Employees in the USA are granted to employees in two different forms:

1. Incentive stock options (ISOs) and

2. Non-qualified stock options (NQSOs or NSOs).

The difference between these two types of options lies in taxation.

ESO Taxation

The IRS has determined that “no taxable event” has occurred when an employee is granted stock options. However, depending on the type of stock option received by the employee he may or may not be taxed when he exercises his option.

– Incentive stock option (ISOs) are not taxed when exercised as long as IRS regulations are followed.

o ISOs must be held for over one year after the exercise date to receive favorable capital gains tax treatment.

– Non-qualified stock options (NQSOs or NSOs) are taxed when exercised.

– Taxes can be minimized if options are held into the capital gains period.

Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.

Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.

Author Bio: Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.

Category: Finances
Keywords: Finance,Business Funding,Venture Capital,Business