Contract Differences Between Employee Stock Options and Standard Exchange Traded Call Options
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Dr. Brent Lundell, PhD, MBA
Apr 18, 2013, 2:10:06 PM4/18/13
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Dr. Brent Lundell, PhD, MBA
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Article Title: Contract Differences Between Employee Stock Options and Standard Exchange Traded Call Options
Author: Dr. Brent Lundell, PhD, MBA
Word Count: 714
Article URL: http://www.isnare.com/?aid=1833549&ca=Finances
Format: 64cpl
Contact The Author: http://www.isnare.com/eta.php?aid=1833549
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Stock options can be used to both protect and create profits for typical investors. For example during the dot.com bubble of the late 1990s one of the owners of a major internet company purchased put options to protect against a stock value decline. He kept these positions in place. After the collapse he made over a billion dollars by exercising his puts and purchased an NBA team.
In contrast to purchasing exchange traded stock options employees can acquire employee stock options offered by their company. These options provide the ability to purchase stock can be acquired before or after the stock has been taken public and can be quite valuable because stock can be purchased often at a discounted price compared to current market prices. For example one Microsoft employee's net worth exceeded a billion dollars a few years ago simply from acquiring as many employee stock options as possible and exercising those options.
The following lists general differences between employee stock options and standard exchange traded stock options:
1. Category: Exercise Price
Employee Stock Option (ESO):
� Non-standard.
� Usually current price of stock when issued.
� Grant price may be lowest point of 60 days.
Standard Call Option:
� Price and or market set by seller.
� Expires on specific date.
2. Category: Quantity
Employee Stock Option (ESO):
� Determined by employer employee contract.
Standard Call Option:
� Sold in round lots of 100.
3. Category: Vesting
Employee Stock Option (ESO):
� Initially X number of shares is granted an employee.
� Employee may get all the shares at once (�cliff vesting�) or may get all shares staggered, in equal or varying amounts, over time (�graded vesting�).
Standard Call Option:
� None required.
4. Category: Events
Employee Stock Option (ESO):
� Some events may need to occur for options to be available.
� Events may include stock reaching X price, a public offering, or X percent profit earned, or performance goals.
Standard Call Option:
� For call option to be valuable the underlying stock must reach or exceed a set stock price called a �strike price.�
5. Category: Duration
Employee Stock Option (ESO):
� Maturity is determined by the employee-employer contract.
� It is not uncommon for options to mature from five years and beyond.
� Must be exercised or they expire on a predetermined date.
Standard Call Option:
� Standard call options have expiration dates after which the option has no value.
6. Category: Non-Transferable
Employee Stock Option (ESO):
� Usually not transferable.
Standard Call Option:
� May be sold at any time before expiration date.
7. Category: Over-the-Counter
Employee Stock Option (ESO):
� Not sold over-the-counter.
� Contractual agreement between employee and employer.
� Employee and employer settle contract between them.
Standard Call Option:
� May be sold at any time before expiration date.
8. Category: Tax Issues
Employee Stock Option (ESO):
� Tax advantaged compared to standard exchange traded options.
Standard Call Option:
� No tax advantages.
Types of Employee Stock Options in the United States
Employees in the USA are granted to employees in two different forms:
1. Incentive stock options (ISOs) and
2. Non-qualified stock options (NQSOs or NSOs).
The difference between these two types of options lies in taxation.
ESO Taxation
The IRS has determined that �no taxable event� has occurred when an employee is granted stock options. However, depending on the type of stock option received by the employee he may or may not be taxed when he exercises his option.
� Incentive stock option (ISOs) are not taxed when exercised as long as IRS regulations are followed.
o ISOs must be held for over one year after the exercise date to receive favorable capital gains tax treatment.
� Non-qualified stock options (NQSOs or NSOs) are taxed when exercised.
� Taxes can be minimized if options are held into the capital gains period.
About The Author: Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.
Please use the HTML version of this article at:
http://www.isnare.com/html.php?aid=1833549
*********************** ARTICLE END ***********************
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Message delivered directly to members of the group:
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*****************************************************************
Please consider this free-reprint article written by:
Dr. Brent Lundell, PhD, MBA
*****************************
IMPORTANT - Publication/Reprint Terms
- You have permission to publish this article electronically in free-only publications such as a website or an ezine as long as the bylines are included.
- You are not allowed to use this article for commercial purposes. The article should only be reprinted in a publicly accessible website and not in a members-only commercial site.
- You are not allowed to post/reprint this article in any sites/publications that contains or supports hate, violence, porn and warez or any indecent and illegal sites/publications.
- You are not allowed to use this article in UCE (Unsolicited Commercial Email) or SPAM. This article MUST be distributed in an opt-in email list only.
- If you distribute this article in an ezine or newsletter, we ask that you send a copy of the newsletter or ezine that contains the article to http://www.isnare.com/eta.php?aid=1833549
- If you post this article in a website/forum/blog, ALL links MUST be set to hyperlinks and we ask that you send a copy of the URL where the article is posted to http://www.isnare.com/eta.php?aid=1833549
- We request that you ask permission from the author if you want to publish this article in print.
The role of iSnare.com is only to distribute this article as part of its Article Distribution feature ( http://www.isnare.com/distribution.php ). iSnare.com does NOT own this article, please respect the author's copyright and this publication/reprint terms. If you do not agree to any of these terms, please do not reprint or publish this article.
*****************************
Article Title: Contract Differences Between Employee Stock Options and Standard Exchange Traded Call Options
Author: Dr. Brent Lundell, PhD, MBA
Word Count: 714
Article URL: http://www.isnare.com/?aid=1833549&ca=Finances
Format: 64cpl
Contact The Author: http://www.isnare.com/eta.php?aid=1833549
Easy Publish Tool: http://www.isnare.com/html.php?aid=1833549
*********************** ARTICLE START ***********************
Stock options can be used to both protect and create profits for typical investors. For example during the dot.com bubble of the late 1990s one of the owners of a major internet company purchased put options to protect against a stock value decline. He kept these positions in place. After the collapse he made over a billion dollars by exercising his puts and purchased an NBA team.
In contrast to purchasing exchange traded stock options employees can acquire employee stock options offered by their company. These options provide the ability to purchase stock can be acquired before or after the stock has been taken public and can be quite valuable because stock can be purchased often at a discounted price compared to current market prices. For example one Microsoft employee's net worth exceeded a billion dollars a few years ago simply from acquiring as many employee stock options as possible and exercising those options.
The following lists general differences between employee stock options and standard exchange traded stock options:
1. Category: Exercise Price
Employee Stock Option (ESO):
� Non-standard.
� Usually current price of stock when issued.
� Grant price may be lowest point of 60 days.
Standard Call Option:
� Price and or market set by seller.
� Expires on specific date.
2. Category: Quantity
Employee Stock Option (ESO):
� Determined by employer employee contract.
Standard Call Option:
� Sold in round lots of 100.
3. Category: Vesting
Employee Stock Option (ESO):
� Initially X number of shares is granted an employee.
� Employee may get all the shares at once (�cliff vesting�) or may get all shares staggered, in equal or varying amounts, over time (�graded vesting�).
Standard Call Option:
� None required.
4. Category: Events
Employee Stock Option (ESO):
� Some events may need to occur for options to be available.
� Events may include stock reaching X price, a public offering, or X percent profit earned, or performance goals.
Standard Call Option:
� For call option to be valuable the underlying stock must reach or exceed a set stock price called a �strike price.�
5. Category: Duration
Employee Stock Option (ESO):
� Maturity is determined by the employee-employer contract.
� It is not uncommon for options to mature from five years and beyond.
� Must be exercised or they expire on a predetermined date.
Standard Call Option:
� Standard call options have expiration dates after which the option has no value.
6. Category: Non-Transferable
Employee Stock Option (ESO):
� Usually not transferable.
Standard Call Option:
� May be sold at any time before expiration date.
7. Category: Over-the-Counter
Employee Stock Option (ESO):
� Not sold over-the-counter.
� Contractual agreement between employee and employer.
� Employee and employer settle contract between them.
Standard Call Option:
� May be sold at any time before expiration date.
8. Category: Tax Issues
Employee Stock Option (ESO):
� Tax advantaged compared to standard exchange traded options.
Standard Call Option:
� No tax advantages.
Types of Employee Stock Options in the United States
Employees in the USA are granted to employees in two different forms:
1. Incentive stock options (ISOs) and
2. Non-qualified stock options (NQSOs or NSOs).
The difference between these two types of options lies in taxation.
ESO Taxation
The IRS has determined that �no taxable event� has occurred when an employee is granted stock options. However, depending on the type of stock option received by the employee he may or may not be taxed when he exercises his option.
� Incentive stock option (ISOs) are not taxed when exercised as long as IRS regulations are followed.
o ISOs must be held for over one year after the exercise date to receive favorable capital gains tax treatment.
� Non-qualified stock options (NQSOs or NSOs) are taxed when exercised.
� Taxes can be minimized if options are held into the capital gains period.
About The Author: Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.
Please use the HTML version of this article at:
http://www.isnare.com/html.php?aid=1833549
*********************** ARTICLE END ***********************
- To distribute your articles go to http://www.isnare.com/distribution.php
- For more free-reprint articles go to http://www.isnare.com
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