10-Point Checklist for an Employee When Accepting Employee Stock Option Offer

Employees in today’s times are not dependent on the weekly salaries only, as more and more companies (especially venture-backed and startups) offer compensation to talented people in the form of stock options as well. 

These employee stock options (ESO) give a right, not the obligation, to the employees to own a certain stake in a firm, in the form of shares, based on the agreed price. These shares can be sold by them at a later stage, specific to established conditions, to gain financial gain. 

While, in the hindsight, it can be seen as an easy and profitable option, but employee stock options do come with their fair share of complications. Therefore, the employees are advised to proceed through carefully before accepting the terms of the stock options. Below, we have created a checklist that each and every employee needs to go through when finalizing the ESO agreement with the employer:

1. Is the stock option a viable and profitable to you, relative to your long-term financial gains? Are there any alternative compensation options that you can get which could prove to be more profitable?
2. Will company’s stocks rise in the future, or do you see the potential loss in that? While this may seem uncertain at the moment, assessing and evaluating the company’s value may help you make an informed choice.
3. Will the management execute increased scrutiny of your performance due to our vested interest in the firm’s profitability?
4. Will the company’s valuation get affected by incorporating minority shareholders’ interests?
5. What accounting process will the company use to book stock options’ value and taxation of discounted options?
6. Will your stock option plan need to be approved by the shareholders? 
7. What is the limit of the number of the stocks reserved for issuance?
8. Will you be able to buy shares during the condition when an option holder leaves the firm?
9. What will happen to the stocks' vesting conditions if the firm goes through a change in management or control?
10. What is the taxation conditions, especially Alternate Minimum Tax (AMT)?

Go through the exact terms of the agreement thoroughly understanding each and every condition. If there is any doubt regarding any subject related to Incentive Stock Options (ISO), Non-qualified (NSO) Stock Options, taxation, or any other condition, do not hesitate to discuss that thoroughly with your employer.

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