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What are these stock options my company gave me?

First off, congrats! You are officially a stockholder! Wahoo! 

Not feeling fantastic yet? It’s probably because the lingo with stock options is absurdly complicated. For no.damn.reason. So, we’ve simplified it. 

Today, we’ll cover the most common stock options, and answer the 2 main questions floating around in your head: What the heck do you own? And what should you do with it?

📸: @naomianwerr

What are RSUs?

Restricted Stock Units

AKA future money in the form of stock, if you stick it out with the company   

This one can feel a little bittersweet. 

You get a certain number of shares of company stock (for free—yay!)

BUT you don’t own them until a certain date. Plus, you can’t sell them until a future date to get actual cash money. 

This is a way for the company to keep you around as long as possible. 

You just got a bonus, that could be worth more or less in the future, that locks you into staying at that company, but you have nothing to show for it today. Nervous, yet? Us too.

For example:

Today – You’re awarded 120 RSUs of Company XYZ on a 3 year vest. 

The stocks aren’t really yours yet. You have the right to them later. So, no taxes paid at this point. And if you quit tomorrow, you lose the 120 shares.

1 Year Later – Let’s say 40 shares of Company XYZ have “vested”

Meaning: you now own 40 shares out of the 120. If you quit tomorrow, these 40 shares are yours. This is the moment you start paying taxes. 

Also, you might be able to sell the shares at this point for cash, but some companies make you wait until a certain trading window. Talk about delayed job satisfaction.

2 Years Later – 40 more shares of Company XYZ have “vested'' and you now own them. 

Same story. If you quit at this point, 80 of the original 120 shares are YOURS. But you would lose the rest. (And yes, you’re paying taxes on those extra 40 now too.)

3 Years Later – The final 40 shares of Company XYZ have “vested'' and you own all of them. 

You have “fully vested” and if you quit, you lose nothing. Those shares are all officially yours. 

If you sell these shares (after you have full ownership), you have to pay taxes on the price that day minus the price it was the day you received the shares (ie. “cost basis”). After tax, the amount you sell the shares for is profit in your pocket.

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MYTH: RSUs are stock “options”.

TRUTH: RSUs are stock “units”, not stock options. 

You already “pre-own” RSUs, so you don’t get the option to buy these stock units at a later date (in fact, you don’t have to buy them at all, since your company gives them to you). 

The catch? You gotta wait a little while before you get full ownership of these stocks, so you can’t cash in on dividends, or sell them for money until the allotted time has passed.

What are ISOs?

Incentive Stock Options

AKA the option to buy your company’s stock in the future (hopefully at a discount so you can make $$$)

Ok, listen up: stock options should not be confused with stock bonuses. 

Stock options are not a freebie. You just got an option to make money one day in the future. 

But what do we know about money? You have to spend some, to make some, right? The same is true here.

Your company is giving you the right to buy their stock at a specific, locked-in price in the future.

This way, you can follow their stock price, and when you see it go up and up and up, you can get in on the investing game at a deep discount. 

It's all theoretical and hypothetical, and only a good idea if your company's stock price goes up. If their stock price goes down, your options are worth nothing ☹ 

For example:

Today – You are granted 1,000 stock options. The company's stock price is $25 per share. 

You have the option to buy your company's stock at $25, but that would cost you $25k. What?!

(Keep reading, it might be worthwhile.)

1 year later – The stock price doubles to $50. 

This means your stock options are now worth $50k. You get to buy the stock for $25k (the locked-in price) and it’s already worth $50k. You just *theoretically* made $25k. Heck ya!

2 years later – The stock prices goes up to $100. Your shares are worth $100k. HOLY SMOKES!

You decide, ya, I better sell this stock, I’ve made a ton of money. You’ve now made $75k. 

(Not $100k, because you’ll have a big tax bill. But $75,000 is a lot of money!)

What if you don’t have $25k to buy the stock? Or you don’t want to withdraw that much from your bank account?

You can do a “cashless exercise” – which means you sell the shares immediately, and $25k is deposited into your bank account. (P.S. You gotta pay hefty taxes. Nothing is THAT good.)

Alternatively, you might be a super saver who has $25k in your bank account, and you decide that you believe in your company a million percent. You think the stock is going to keep going up, so you don’t want to sell the stock for cash money just yet. 

You bite the bullet and pay $25k for the stock, and keep it. You don’t pay any taxes today, you just have a stock account worth multiple figures for now. You only pay taxes once you sell them.

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MYTH: My company is gonna tell me what to do with these and when. 

TRUTH: Nope! And they probably want you to forget you even have these, because STOCK OPTIONS CAN EXPIRE IF YOU DON’T TAKE ACTION. Please, write the vesting dates into your calendar and cash in before that happens!

What are NSOs?

Non-Qualified Stock Options

AKA future money in the form of stock, if you stick it out with the company   

Same exact thing as an ISO, except you get better tax treatment. You only pay taxes on a portion of your profits. 

The gal who made $75k in the exercise above? If she had NSOs instead of ISOs, she would pay much less in taxes. And that’s always great news! ;)

Easy way to remember the difference: Non-qualified = Not-as-taxable.

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MYTH: these are worth a lot of money when they are given to you 

TRUTH: not necessarily… These puppies could cost you a bundle to buy, and they’re only worth $$ if the company's stock price keeps going up.

Bottom Line

Stock compensation is tricky. Lots of rules, lots of dates, lots of hypotheticals. 

Pay close attention. It could be free money one day, LOTS of money if your company does well, and you could use the extra boost to your net worth. 

Ultimately, your decision depends on how much you trust your company to do well in the future, and how long you plan on sticking around. 

The one thing you can’t avoid if you were given stock options or stock units? 

Following the stock market! 

You might wanna add your company's stock ticker to your Apple stocks and check their market price once in a while. Or, set a calendar reminder for yourself to have a date with your money once a month. Wine and roses included. Afterall, even your stocks deserve some lovin’ ;) 

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