taking advantage of your stock options or participating in an employee
stock purchase plan, it's necessary to understand exactly what's
being offered. Typically, an employer will provide an option agreement,
explaining the stock option or employee stock purchase plan in which
you're being invited to participate. This agreement will be filled
with investment-related terminology you'll need to know in order
to understand the terms of your option. It will include details
about the following.
- The number of shares you can buy.
- The purchase price of the stock.
- The timeframe during which you can exercise your options.
- The limitations and guidelines for the program.
list below contains some of the more common terms associated with
stock options and employee stock purchase plans. Definitions of
these and other compensation-related terms appear in the Salary.com
gains. Profits earned from selling an investment or stock. In
the United States, you owe tax on the capital gains of an investment
when you sell the shares and realize gains. You might also become
tax-liable simply by purchasing shares or certain types of options,
so make sure you know what you're getting when you exercise your
A portion of profits a company or mutual fund pays to its shareholders.
stock purchase plan. A type of employee benefit. Participants
in this type of plan are often able to purchase stock at a discounted
price (usually at a 15 percent discount from the current market
value). Participants don't pay taxes on the investment until they
sell their stock (for a profit, they hope).
The process by which an employee purchases stock he or she has
the option to purchase. Being offered an option does not require
the employee to purchase the stock or exercise the option.
price. The price at which a holder of stock options is able
to purchase the stock. Also called the strike price.
date. The date by which the owner of the option must decide
whether to exercise the option and actually purchase the stock.
public. Also called an initial public offering (IPO). A company
goes public when it makes the transition from being privately held
(owned by individuals and private funds such as venture capital
funds), to offering its first group of stocks for sale on a common
market (via a stock exchange, such as the New York Stock Exchange).
At this time, the value of the company - and its employees' options
- often increases substantially, and the company's financial performance
becomes accountable to the expectations of the entire market.
price. The market price of a stock at the time the employee
is granted an option. The employee may pay less than this amount
if the exercise price is at a discount from the grant price.
stock option. This type of stock option meets certain requirements
set up by the Internal Revenue Code. It's available only to employees
of a company. With this type of option, income is reported only
when the stock is sold, not when the option is received or exercised.
If the stock is held long enough, the employee may report long-term
capital gains instead of compensation income, which could offer
a significant tax savings.
An initial public offering. This is the first sale of stock
of a company in a publicly traded market, via a stock exchange (such
as the New York Stock Exchange). See also going public.
ISO stock. When purchasing incentive stock options (ISO), especially
if the company is about to go public or has recently gone public,
employees are commonly required to hold on to the stock (not sell
their shares) for a predetermined period, often several years. When
this holding period is over, the stock the employee owns is considered
mature ISO stock and may be sold. The profit is then considered
a capital gain as opposed to compensation income.
stock option. With this type of stock option, which has become
very popular, the employee must report income upon exercising the
stock. The gain - the difference between the sale price and the
purchase price - is treated as income for tax purposes.
The right, but not the obligation, to purchase something at
a specific price at a specific time. In compensation terms, a stock
agreement. A document (or series of documents) that outlines
the terms of and rules pertaining to an employee's stock options.
a sample option agreement.
A document describing the financial details associated with
an investment opportunity. Companies that offer stock are required
to issue a prospectus. It contains background information about
the company - its products and services, its financial situation,
and its financial forecasts. A prospectus is designed to help an
investor make educated decisions about an investment opportunity.
Someone who owns stock (shares) in a company. These are the
people to whom the company is ultimately accountable for its financial
performance. Note that option holders are not in the same league
as bona fide shareholders.
The difference between the current market value of a stock and
the strike price.
purchase plan. Offers made to employees allowing them to purchase
a stated number of shares of stock.
price. The price at which a holder of stock options is able
to purchase the stock. Also called the exercise price.
The period over which an employee has the ability to realize
rights, such as stock options or employer matching contributions
to retirement savings plans. For example, a retirement savings plan
might have a five-year vesting schedule, where after each year of
employment the employee has the right to keep an additional 20 percent
of employer contributions to the account. Or, an employee might
be vested in 25 percent of his or her stock options after each six
months of employment. Vesting schedules vary from company to company.
A stock is considered "vested" when the employee may leave
the job, yet maintain ownership of the stock with no consequences.
Employees of some companies may need to meet certain requirements
after exercising options, such as remaining with the employer for
a predetermined period, in order to keep the stock.
- Jason Rich, Salary.com contributor