5 Common Questions You Should Ask When Receiving Employee Stock Options in a Start-Up

ESO is defined as the employee stock option which is granted to an employee of the firm, as a kind of reward or remuneration for their outstanding professional work. If you are someone who is provided with employee stock options in a start-up company, you can reduce the chances of risk and boost returns by utilizing advanced strategies that consist of selling calls and buying puts on the company stock.

Stock options can be an advantageous option, but the value of the proposed offer can vary significantly. There are simply no guarantees. So, whether you are considering a job offer that includes a stock grant, or you hold the stock as part of your current compensation, it’s essential to understand the basics. Few important and common questions you need to know put forward to the employer about start-up employee stock options are mentioned below:

1. What are the two most fundamental types of employee stock offerings?

Two of the most common employee stock offerings are stock options and restricted stock. Employee stock options are the most widespread among start-up companies. The possibilities give the opportunity to purchase company's stock at a pre-determined price, typically referred to as the “strike” price. Your right to purchase – or “exercise” – stock options is subject to a vesting schedule, which defines when you can exercise the options.

Restricted stock grants bestow employees with a right to receive shares at minimum cost. But these stock grants are subject to a vesting schedule, typically tied to either passage of time or achievement of a specific goal.

2. What is the difference between ‘incentive’ and ‘non-qualified stock options”?

Incentive stock options (ISO) qualify for special treatment by the IRS; it means taxes don’t have to be paid when these options are exercised. You also need to be fully aware of the ISO tax form and other related information to make informed choices when exercising.

Whereas, non-qualified stock options (NSO) includes ordinary taxable process when exercised. Tax is dependent on the difference between the exercise price and the fair market value at the time of exercise.

3. What about taxes?

Tax treatment for each transaction will be based on the type of stock option you have and other factors associated with your situation. Before you exercise your options and sell shares, you’ll want to consider the consequences of the transaction diligently. For particular advice or suggestion, you can consult a tax advisor or accountant.

4. How will I come to know whether to hold or sell after I exercise?

When it comes to employee stock options and shares, the decision to hold or sell comes to the basics of long-term investing. Before exercising, keeping or selling some or all of your shares you should consider questions that are mentioned below:

• How much risk am I willing to take?
• Is my portfolio well-diversified based on my current needs and goals?
• How does this investment fit in with my overall financial strategy?

5. How much of my company’s stock should I own?

It’s good to have faith in your employer, but uncertainties are everywhere. Before making any investment, you should consider your total portfolio and overall diversification strategy. Usually, it’s not supposed to be a great idea to have portfolio that is overly dependent on any one investment.

For employee stock options, your manager or some executive in your company’s HR department can give you more details about your company’s plan and the benefits you qualify for under the program. A seeker should also consult financial planner or tax advisor to make sure that you have got all the details regarding how stock grants work, vesting events, exercising and selling affect your tax situation and how to defer NSO tax.

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