How Do Stock Options Work?

How are my options taxed and reported? When should I exercise my options? Where does ESO Fund fit into the equation? What are employee stock options?Table of Contents
  • What are employee stock options?
  • How can I value my stock options?
  • How are my options taxed and reported?
  • When should I exercise my options?
  • Where does ESO Fund fit into the equation?

What are Employee Stock Options?

Employee stock options are the right given to an employee of a public or private company to purchase shares of the company at a given price (Strike Price or Exercise Price). Their purpose is to give the employees an incentive to work hard and stay with the company by giving them the opportunity to become shareholders, thus aligning the interests of the employee and the company.

The most important things to understand when you receive employee stock options is the number of options granted, your exercise (strike) price, the type of options you received, your vesting schedule, and your expiration date.

For example:

120,000 options with an exercise price of $1.00, vesting monthly 1/48th of the total number of shares with a 1-year cliff and 10-year expiration

Means:

You have been granted 120,000 options each worth $1/share. After one-year, 30,000 options will vest and 2,500 options will vest every month following that 1-year cliff date. The options will need to be exercised (costing $120,000) before 10 years after the date they are granted, or they will expire. (Typically, when you leave a company your options will expire 90 days after you last day of work)

More on the different types of employee stock options

How can I value my stock options?

This is a tough question which we attempted to answer here.

Without being precise, you can value your options based on the Fair Market Value of the options, or by looking at how much VC's paid per share in the last funding round. Ultimately, your options have no real value until the company goes through an IPO or M&A.

How are my options taxed and reported?

Depending on what type of options you have (ISOs or NSOs), they are taxed differently at exercise, although the taxes are calculated based on the spread between the current Fair Market Value (FMV) and your strike price.

Options are also taxed at liquidity as capital gains.

More on stock option taxes

When should I exercise my options?

Typically, you should only exercise your options for three reasons: you are leaving the company (or want flexibility to leave), you want to reduce taxes, or your options are expiring soon.

More on when to exercise employee stock options.

Where does ESO Fund fit into the equation?

The Employee Stock Option Fund provides current and former employees of venture-backed companies with the cash needed to exercise their options and cover associated taxes. By partnering with ESO, the employee retains potential upside. If the company goes under and the shares are worthless, ESO bears the risk and not the employee.

If you are interested in working with ESO Fund to fund your option exercise, fill out our form below!

This innovative service promotes and enables a healthier relationship between companies and employees. I my opinion it's valuable to employees and great for the overall tech environment and economy. It is good for nobody when employees feel trapped because they can't afford to leave. In less extreme cases exercising can be expensive and somewhat risky and this is simply a good smart hedge and a good square deal. Brilliant!

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