How to Offer Stock Options or Grants to Employees

by Tony Guerra

Many companies offer discounted shares of their stock to reward top management as well as key employees. Offering stock options or option grants to certain managers and employees has been considered a way to ensure employees' interests align with those of their employers. Also, offering employees an option to buy shares of company stock at a specified price may potentially net employees a nice profit per share. Companies instituting employee stock option or option grant programs, though, should do so with care.

Stock Options and Grant Prices

Employee stock option programs allow employees the option to buy their employers' stock at set prices. For example, a company may allow its employees to exercise an option to purchase stock at $10 per share, even if those shares are worth $20 each, but only during specified time periods. The price at which a company provides its employees a purchase option for its shares is called the grant price. Stock option grant prices are usually their market prices when the options are offered.

Stock Option Types

There are two major kinds of stock option programs: non-qualified stock options and incentive stock options, or ISOs. Non-qualified stock options aren't eligible for the more favorable tax treatment given to ISOs. With non-qualified stock options, taxes are generally owed on the difference between the price you pay for your stock and its market price that day, and the taxes are due in the year you purchased that stock. With ISOs taxes, aren't owed until you sell the stock, which could be years after you purchase it.

Offering Stock Options

If you want to offer your employees stock options, be sure they understand what they are getting: an option to buy stock. Employees also need to understand that stock options expire at some point and they will have to exercise those options beforehand, if they want the stock. Your employees should also understand the tax implications to any stock option plan you offer. Additionally, never "back date" option grants for employees to ensure they get a lower, more favorable price. Doing so could result in an illegal stock transaction.

When They're Appropriate

There are advantages and disadvantages to both kinds of stock option programs and both are flexible ways for companies to share ownership with employees. Stock option programs are appropriate for growth-oriented smaller companies wanting to preserve cash but give employees a way to get in on their companies' growth. Publicly held companies with mature, well-administered benefits plans can also make use of stock options programs. However, stock options should be avoided by companies whose future growth prospects are uncertain or for smaller, non-public closely held companies.

About the Author

Tony Guerra served more than 20 years in the U.S. Navy. He also spent seven years as an airline operations manager. Guerra is a former realtor, real-estate salesperson, associate broker and real-estate education instructor. He holds a master's degree in management and a bachelor's degree in interdisciplinary studies.

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