According to investopedia.com Stock options are commonly known as an option to purchase shares. This gives an investor the option to purchase shares or sell shares at a price agreed upon price. There are two types of stock options: puts and calls. Puts are defined as a wager that a stock will fall. Calls are a bet that a stock will rise.
During your working life you may be offered stock options as payment. Charles Barkley, a famous basketball player, stated in an interview that both he and Michael Jordan chose to sign with Nike when it came to their shoedeal. Michael advised Charles to stop taking everything in cash and instead get paid a portion of the deal in stock options. Charles goes on to say that he probably made 10 times the money he would have made thanks to the stock options.
However, here is the kicker: stock options aren’t stocks. Don’t be confused and believe that stock options are the same as stocks. Some companies pay some of their employees salaries in stock. Just to be clear stock options are only an opportunity for you to buy or sell stocks at a price you agreed upon.
Are stock options worth it?
Research Stock Options
Stock options are a way of paying you and an opportunity to invest. In the article Are my stock options worth it? You can read that stock options are very lucrative and misunderstood by people. Stock options aren’t guaranteed to pay you. Stock options are a way for the company that you work for to show how valuable you are to them. You are being given the option to purchase shares in the company you work for at a low cost.
Stock options should be evaluated just like any other type of financial commitment you want to make. Do not hold any biases toward your company. Mistakes are made when you don’t view things objectively. Use the knowledge you have obtained from working at the company to evaluate whether or not you want to purchase the stock options.
Take these things into account during the research process:
- What is my company’s current valuation?
- What stage was my company when my equity was granted? (For example, getting it at Series A is likely a lower strike price than Series F.)
- What is my strike price?
- What is the current 409A?
- Does my company have plans to raise a new round of funding soon?
- Do I think my company is worth investing in?
- How long do I plan to be at the company? Will it become more valuable
- Is there an entry point that I believe will give me an upside?
On occasion employees may feel very optimistic about the company’s future. They also don’t want the market to be shaky at the time they purchase shares. At the same time they want to save as much money as possible when they exercise their right to purchase shares. Don’t make excuses for not using your stock options. Instead research them objectively and come to a decision using facts.
What If
When you are getting a proposal that involves anything financial you should consider the what if factors. It is better to be prepared for the worst than end up as a feather in the wind. For example, let’s say that you have saved money to purchase these shares and after you have purchased the shares the market tanks. Are you going to be okay or are you going to be struggling financially? It is also important to not be upset if you lose your savings, because stocks can always go up again.
Before you exercise your right to purchase stock options make sure you don’t need to take a loan to be able to purchase stocks. At the same time make sure to not depend on these shares of stocks taking off.
Conclusion
Stock options offer you a plethora of potential rewards and risks at the same time. We explored this topic during the article and came to some definitive conclusions. Stock options need to be researched just the same as any other financial directions you make in life.
Stock options are rewarding and destructive at the same time. Researching and taking certain things into account like certain questions for example: Does my company have plans to raise a new round of funding soon? Do I think my company is worth investing in?
Finally, you have to be prepared for a what if scenario. What happens if your stock options aren’t a good option anymore? You just worked for nothing, because they were your compensation for services rendered. At the same time make sure to not be dependant on the success of your stock shares.
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