What You Need to Know About Some Vital Keys and Terms of NSO Stock Options

Employee Stock Options (ESOs) offer the option holder the right to buy a certain amount of company shares at a predetermined price for a specific period of time. It is classified into two parts that are- NSO (non-qualified stock options) and ISO (incentive stock options). Here, we will discuss NSO stock options.

NSO stock options are stock options which do not possess special treatment like those accorded to incentive stock options. As it is obvious from the name, non-qualified stock options represent an offer to the employee by the employer to purchase company stock at a price which tends to be generally below the current market price. Its key terms and conditions are mentioned below:

1. Grant date: The date on which the company grants an employee permission to buy a specific number of shares at a pre-determined price within a set period of time.
2. Exercise date: The date on which the employee exercises his or her right to buy the shares at the exercise price and effects a purchase transaction. These first two dates are those on which a taxable event occurs for NSOs.
3. Exercise price: The price at which the employee can buy the stock in the plan. This price is supposed to be lower than the market value, and companies usually set the price based upon a set discount formula from its current market price. However, it is possible for the stock price to go below the exercise price, at which options become worthless because no employee would ever want to buy the stock price above the existing market value.
4. Sale date: The second taxable event in the NSO process. This is the date on which the employee sells the stock.
5. Expiration date: The date on which the offer extended at the grant date to exercise the options terminates.
6. Bargain element: The amount of profit that an employee gets when they exercise their options. This amount equals the difference between the exercise value and the current market value.

The key terms which are important for NSO stock options are evident now. Before buying stock options, one should enlist the advantages which will be given to the buyer, such as- increased income, tax deductions, tax deferral, and improvement in employee’s tenure and morale.

When it comes to cashing out stock options, then the favorable situation is that an employee should hold the stocks until the price rises to a favorable price, then list the stocks for sale. But considering this only will not help you maximize your returns. There are a lot of other factors accompanying stock options that must be considered by the holder for a fruitful result.

Read more »

Posted in: Cashing Out Stock Options,NSO stock options

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.

Read more »

Posted in: employee stock option plans employee stock options,ESO,exercising employee stock options,loan to exercise stock options,NSO stock options

What Are Restricted Stock Units? How They Are Different From Other Stock Options?

Employee stock options have become hugely popular in the recent times, specifically within the culture of startups and venture-backed firms. However, there are a lot of factors, terms and other calculations that are a part of this stock culture.

One of these can be referred as restricted stock option or restricted stock unit (RSUs). These are offered by the employee to an employer as part of a compensation package. However, there is a catch: the employee does not receive the stock immediately, but only after they have satisfied certain conditions laid down by the employer. The condition often elates to the employee staying with the company for a specific period of time and achieving required performance milestone before they are granted all the stocks.

Why Employees Give Restricted Stock Units?

Whenever an employee feels that a particular individual is of high value to their company’s growth and business plans they want to reward them, but also want to ensure that they stay with the firm for a minimum period. And therefore, these types of stocks come with a time limit (commonly known as a vesting schedule). Due to this nature, these stocks are defined as Restricted.

By offering a promise of future financial benefit, they are able to retain key talents for their business. When the employee knows that the future gain with their stocks depends on how the company performances, they ensure their best possible performance, befitting the company’s objectives. The employee also gets benefitted, as over the time, post the vesting period, if the value of the company increases, they can gain huge financial gains.

Restricted Option After Vesting

There are two factors that need to be considered after the vesting period:

Ownership Of The Stock

After the vesting period, the employee becomes the sole owner of the stocks. They have the privilege of retaining or selling employee stock options, or converting them to cash, or receiving dividends.

Taxation

The RSUs are taxed as soon they are vested, and are taxed at ordinary tax rates. In several cases, the employer withholds some of the stock units as payment for taxes. In other cases, the employer may let the employee retain the RSUs and give the option to pay the taxes with cash.There is no risk of forfeiture and therefore the owner of the stock pays income tax on the received value. 

The rules and complexities differ with different companies. You need to go through a detailed assessment an analysis of the plan specifics to plan for your finances, not only when it concerns the restricted options, but also with NSO stock options, and so, to gain favorable results.

Read more »

Posted in: NSO stock options,Selling employee stock options