Many employees receive equity as compensation, often in the form of stock options. This is common among senior executives and other employees who work in early-stage companies. Use our calculator to help determine whether you should exercise, hold or sell our stock options.
This refers to the time period that you anticipate holding the options. At the end of this period, the options will either expire worthless or they can be exercised and sold for a profit.
This is the number of stock options awarded to you by your employer.
The stock price refers to the current market value of a single share in the company. When the stock price is above the strike price of your options, you are “in the money” — meaning that your options have value.
The strike price is the predetermined price at which the company’s stock can be purchased by the options holder. When the stock price goes above the strike price, the options are considered “in the money” and hold value. If the options expire below the strike price or “out of the money,” they become worthless.
This is the assumed annual rate by which the company’s shares will grow in value. Keep in mind that this is only a hypothetical scenario and not a guaranteed outcome.
Dividends are payments made by some companies to stockholders. Usually, dividend payments are made on a quarterly basis but, sometimes, they are made on an annual or ad-hoc basis. Enter the total amount of dividends per share that you anticipate receiving over the course of a year.
Enter the annual rate of return for an alternative investment instrument. This would be the place where you invest your capital if you weren’t putting it into stock options. For example, the historic rate of return of long-term United States bonds is 5% while the rate of return for stocks is 10% (before inflation).
The margin tax bracket refers to the highest tax rate that applies to your income. Consult the current federal income tax brackets and rates for your exact percentage.
The IRS treats investments held for more than a year as long-term capital gains. You may owe 0 percent, 15% or 20% tax on income from dividends, depending on your tax bracket.
Stock options represent the right (but not the obligation) to purchase stock in a company. A standard stock option contract represents 100 shares of the underlying stock. These contracts last for a finite period of time from weeks to years. For certain industries and roles, stock options are a common form of employee compensation.
If the company’s stock price is above the option’s strike price at the time of expiration, it is considered “in the money.” In other words, the option holder can purchase the stock at a below-market rate. Option holders stand to make a great deal of money if the stock price rises significantly above the strike price of the option. However, if the option expires when the stock price is below the strike price, the option holder earns nothing.
In the short term, stock prices are hard to predict. General economic conditions, managerial turnover and geopolitical events are a few of the factors that can affect stock prices over the short term. Over the long term, however, the stock price will generally track the company’s underlying performance. The more profit the company earns, the more the stock price will appreciate. If the company fails to generate a satisfactory return for shareholders, the stock price will suffer as a result.
Ideally, you want to cash in on your stock options when the company’s share price rises above the strike price. Most stock option grants follow a vesting schedule, meaning that you can’t exercise your options until a specified date. However, you don’t want to wait until the stock options expire or you will forfeit their value.