If you’re a woman executive, it’s extremely important for you to understand the power of owning equity in a company and its ability to create great wealth. According to The Carta Study, women own just 47 cents for every dollar that a man owns in equity. Stock options give you the right to purchase your company’s stock for a set price at a future date during a specified buying window. The company’s board sets the exercise price based on the fair market value.
Whether you’re a leader at a start-up or a senior executive in a Fortune 500 company, you should negotiate stock options as part of your overall compensation package. Stock options or shares are awarded not only to employees, but also to directors, advisors and consultants. They’re an extremely popular method of attracting, motivating, and retaining talent, and a way for a company to dispense rewards without having to pay out cash.
How Stock Options Work
Don’t leave any compensation considerations on the table. The benefits of stock options can completely change the financial legacy for a woman and her family. Here’s how they work:
- A company hires you. As part of your employment package, you negotiate that the company will grant you stock options to purchase 10,000 shares of its common stock at $1 per share. This is the company’s current share market value as of the date options are given to you.
- In order to exercise (cash in) the stock options, you’ll have to stay with the company five years and you can’t exercise any options within your first year. This is called a one-year cliff vesting period. Afterwards, you can exercise one-quarter or 2,500 of your options per year.
- During your second year of employment, the first 2,500 options are vested (which means they’re exercisable or convertible to shares in the company). In the third year, another 2,500 options are vested and so on until you reach the end of your fifth year, when all of your options are vested.
- You can choose to exercise your options as they vest or wait until the end of the fifth year and exercise all 10,000 options at once. The latter may be a consideration if you anticipate that a private company will go public or you believe a public company will continue to grow, thus increasing its stock price.
- You should only consider exercising if the stock's price has risen above $1.
- After five years, you decide to exercise your 10,000 stock options and buy 10,000 shares at $1. That costs you $10,000.
- The current stock price is $50 per share. Now your 10,000 shares are worth $500,000. Your investment of $10,000 has made you a $490,000 profit and significantly increased your net worth.
Understanding Taxes and Investment Risk
Talk with your CPA and financial planner before making any major financial decisions. You want to make sure you contemplate and understand any tax and investment risk implications. Remember Enron and the employees who lost everything because they didn’t consider diversifying their company stock holdings? Don't let that be you. Do your research and understand what you agree to.
Employee stock options can be an extraordinary wealth builder. A rising company stock price coupled with a vesting ladder is another way to grow your financial legacy. If it is beneficial to you, it is an opportunity worth taking, especially as a woman. Recent articles by Zaneilia Harris: The Hidden Figures in Investing.
Disclosure: The article is for informational purposes only. Please contact a certified financial planner or financial advisor to assist you with your specific needs.