May 20, 2020 . 3 min

What exactly are stock options?

So yeah, this is me trying to write a non technical blog. Not sure how this will end up. This is just an intro, very basics of what I wished I knew when I started off.

I am not someone who really knows what I am talking about here, you have been warned.

What are they? #

Stock options are an agreement that the company that you work for gives you about its stocks. The agreement pretty much says that you can buy a certain amount of their stocks at a fixed price, which usually is the current stock price of that company or the fair valuation price in case the company has not gone public.

In the case of this fair valuation thingy, usually an external agency does a review on the company and gives a figure as to what the company stock price would be in case the company had gone public.

Why are they? #

So yeah, you get this thing called salary when you work for a company. But along with that at times you get these things as well.

Why would you want it? #

Good question. If you really believe that the startup you are working for is actually gonna make it, your stocks (or stock options) will be worth much more than the initial price that they were offered to you for. If you do not believe in the company, why are you working there?

Why would the company give it? #

A lot of people working there expects it. Plus, by giving employees stock options instead of a direct salary they have more incentive to making sure the company ends up being successful. Also, maybe in the case of a promising initial stage startup without a lot of funding this would be great option.

Sample workflow #

Company offers you stock options #

This is the initial step. The company essentially gives you the option to but some stocks now or in the future. I believe this is called as an option grant. At this point you are not buying any stocks, or saying that you will. You are just given an option to buy the stocks some time in the future at the said price. All you are doing when you agree is that you are saying that the price and number of stocks works for you.

Buying the stocks #

Now that you have your stocks options available and you are siting home thinking "hmm, maybe I should buy the stocks" you get to this step. This is where you actually purchase the stocks that you were "granted" before. Even if the stock price of that company has gone up, you can still buy it at the same price as the one that is mentioned in the option grant.

Caveats #

Vesting schedule #

Just because you have accepted the grant does not mean that you can buy the stocks. Usually, there is a thing called a vesting schedule. Essentially the idea is that you cannot buy up all the stocks and leave the company just because they gave you an option grant. This is nothing fancy, this just limits how much stocks you can buy based on how much time you have worked for the company.

Vesting schedule can change from company to company. A sample vesting schedule can be something like, you can buy 25% of the stocks after 1 year. After than you can buy a small chunk each month for the next 4 years.

Expiry #

Also, these things(grants) expire. You cannot just hold them forever and buy whenever. There is usually a time period from when you accepted the grant to when you the time till when you can buy those stocks.

A sample expiry could be like within 10 years or within 30 days from you leaving the company.

Once you buy #

OK, you have made up your mind and decided to buy those stocks thingies that they gave you. Now what. There are usually two situations.

#1 - Company is public #

In the case that your company is already public, you can just sell that stocks at their current price to whomever is willing to buy it.

#2 - Company is not public #

In this case, your stock selling options are limited, kinda. You can sell them to others, but you might require an NOC from the company whose shares you are selling, to sell it to that person. There is also an option for the company to buy back the stocks from you, not necessary that they have to.

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