Tag: stock options

  • Employees Stock Options are What European Startups Need

    Employees Stock Options are What European Startups Need

    Employees Stock Options are What European Startups Need
    In contrast to Silicon Valley,  European startup employees are not known for earning millions from the company’s stock.
    Stock options policies in Europe are a major barrier to the tech growth and that has to be changed. 

    Employees stock options are issued by many companies. For example, startups use them to hire talented they need because they cannot afford to pay them more in cash.
    The situation is especially difficult in Europe where the policy doesn’t give a chance for companies to issue employees stock options. That causes problems for many companies but for the startups, it is maybe the biggest.

    Recently, the campaign  Not Optional published a letter where stated:

    “Without delay, we call on legislators to fix the patchy, inconsistent and often punitive rules that govern employee ownership — the practice of giving staff options to acquire a slice of the company they’re working for.”

    Some European countries started to relax rules on employee stock options. France is one of them, but employees still favor cash.

    This country recently exposes a list of changes to rules on employee stock options to meet a request from French startups. Their aim is to compete with US competitors and big companies in recruiting staff. 

    France is changing a set of rules, for example, the price at which the companies ( including foreign companies) can offer them to employees. The goal is to make France one of the most friendly areas for startups in Europe. 

    Being competitive

    Difficulties in implementation employee stock option rules and availability of capital, are reasons why European have problems to create large tech businesses. That’s the reason for staying behind the US but the EU wants to keep up. There is a strong campaign for changes in employee stock options in Europe now. 

    According to Not Optional, a campaign is supported by 500 European founders and they are lobbying new stock options policy across the continent.

    They recognize employee stock options policy as a major drawback to European tech growth. Due to the problems with the fund-raising, issuing employee stock options can be a great opportunity. Well, recently many countries declared changes, France isn’t the only one.   

    Ireland changed some of its stock option practices, also, the new Finnish government is examining changes on how stock options are taxed. The German Startups Association has started a campaign to lobby for changes too. As a confirmation that employee stock options are on the Brussels agenda – Thierry Breton, the European Commissioner for Internal Market and Services, discussed stock options in Commission hearings.

    Do employees want stock options instead of cash?

    Many European tech employees are, however, at best doubtful about stock options, according to Sifted. The employees don’t have positive responses. Maybe it’s surprising how they have a lack of trust but someone has to educate them, to explain the benefits of having the company’s stock. For that to do isn’t enough just yelling that “we are all shareholders of the company”. It isn’t complicated.

    So, let’s start. 

    Understanding employee stock options 

    Let’s see how the employee stock options work. 

    Companies give stock options through a contract that provides employees the right to buy a set number of shares of the company stock at a pre-set price. 

    The right to buy is commonly called exercise, and a pre-set price is the grant price. 

    There is one important characteristic connected to employee stock options – time, the offers don’t last forever. Employees have a strict period to exercise the stock options before the date of expiration. Also, the employer could require that an employee must exercise the options within a defined period after leaving the company. 

    The number of options that the company could give to its employees is different from company to company. Also, not all employees will get the same number of stock options. It depends on status, rank, seniority. 

    How do they work

    For example, you got a new job at a new firm. Besides your salary, you will receive stock options, as part of the payments. Let’s say you will receive stock options for 10.000 shares of your new company’s stock. You and the company are both obliged to sign the contract that describes the terms of the stock options.

    There will define the grant date. That is the date your options are available for you to buy. This means your stock options begin to vest. But you will not get all of your stock options immediately when you start working for a company. The options vest gradually. That period is known as the vesting period and it can last several years, for example. So, let’s say the vesting period is 5 years. This means it will take 5 years before you have the right to buy all 10.000 shares. But you’ll have access to some of your stock options before those 5 years are up. 1/5 of your options will likely vest each year over that 5-year vesting period. So, after 3 years of employment, for example, you will have the right to exercise 6.000 options.

    But your contract may contain one important part – a milestone. The clause that you have to stay for at least one year with the company to have a chance to get any of your stock options. When you reach the first milestone you will receive your first 1/5 of your stock options. After that, it is possible to get every month some amount of them, usually, they are the same. For example, the rest of the 8.000 shares you’ll obtain in 48 parts each month. 

    But if you leave the company before reaching the milestone for the first year, you won’t get any options.

    How to exercise

    After your stock options vest once, you can exercise them. What does it mean? You can buy them. Until you do that, the options don’t have any value. The price of your stock options is part of the contract mentioned above. That is a so-called strike price or grant price or exercise price. This price never depends on how the company is doing. It will always stay the same. 

    For example, after your 5-years vesting period, you have 10.000 stock options with a strike price of $2. If you want to exercise (buy) all of your options you’ll have to pay $20.000. When you buy all your stock options you are the owner and you can do with them whatever you want. You can sell them, keep them (only if you think the price will go up) but remember, you have to pay fees, taxes, and commissions when you are buying or selling the options.

    There are some ways to exercise your stock options without spending cash. For example, you can make a buy-and-sell action. To do this, you’ll buy your options and quickly sell them through a brokerage. Another strategy is the exercise-and-sell-to-cover transaction. 

    Practically, you have to sell enough shares to cover your buying of all shares and keep the rest. But be aware, your stock options have an expiration date. So, read the contract carefully. Usually, options expire 10 years from the grant date. After that date, they are useless if you don’t exercise them.

    Bottom line

    It is good to exercise options when the price is lower than the same stock on the market. For example, your stock options’ strike price is $2 but the same stock is traded at $4 on the market. Just sell them and make a profit.  It is obvious, if you have some clue or expectation that your company’s stock price will grow, you can hold them as long as you want and sell them at the most favorable moment. It isn’t forbidden to sell them on the market. 

    But you should wait if the price of your company’s stock is lower than your exercise price. In such a case, don’t exercise them because you might lose your money. Just wait for the price to increase before exercising.

  • Stock Options Everything You Need to Know

    Stock Options Everything You Need to Know

    Stock Options
    The stock options give the holder the right, but not the obligation, to buy (or sell) 100 shares on or before the options expiration date.

    By Guy Avtalyon

    Stock options are financial instruments. That can provide the investor with the flexibility need in almost any investment situation.

    Stock options are contracts that convey to its holder the right, but not the obligation, to buy or sell shares of the underlying security at a specified price on or before a given date. After this specified date, the option stops to exist. The seller of an option is, in turn, obligated to sell (or buy) the shares to the buyer of the option at the specified price upon the buyer’s request.

    The stock options give the holder the right, but not the obligation, to purchase (or sell) 100 shares of a particular underlying stock at a specified strike price on or before the option’s expiration date. The seller of the option is one who grants this right.

    You can recognize two kinds of stock options: American and European. American options are different from European options. The European options permit the holder to exercise the option only on the date of expiry.

    How do stock options work?

    All options are derivative instruments. That means that their prices are derived from the price of another security. More precisely, the underlying stock price will determine the options price, it is derived from the stock price.

    As an example, let’s say you purchase a call option on shares of Intel (Nasdaq: INTC)  with a strike price of $40 and an expiration date of April 16. This option gives you the right to purchase 100 shares of Intel at a price of $40 on or before April 16th. Of course, the right to do this will only be valuable if Intel is trading above $40 per share at that point in time.

    Every stock option represents a contract between a buyer and a seller. The seller has the obligation to either buy or sell stock to the buyer. Of course, at a specified price by a specified date. The buyer, on the other hand, has the right but not the obligation, to execute the transaction. On or before a specified date. If it isn’t in the best interest of the buyer to exercise the option when it expires, the buyer has no further obligations. The buyer has bought the option to execute a transaction in the future. Hence the name – option.

    What is underlying security?

    The particular stock on which an option contract is based is usually known as the underlying security. Stock options are categorized as derivative securities because their value is derived in part from the value and characteristics of the underlying security. A stock option contract’s unit of trade represents the number of shares of underlying stock which are covered by that option. The stock options unit of trade is 100 shares. This indicates that one option contract signifies the right to buy or sell 100 shares of the underlying asset.

    What is the strike price?

    The strike price, or exercise price, of stock options, is the specified share price at which the shares of stock can be bought or sold by the holder, or buyer, of the option contract. To exercise your option is to exercise your right to buy or sell the underlying shares at the specified strike price of the option.

    The strike price for an option is initially set at a price that is reasonably close to the current share price of the underlying security.

    What is the stock options contract?

    A stock options contract is defined by the following elements: type (put or call), style (American, European and Capped), underlying security, a unit of trade (number of shares), strike price, and expiration date. All stock options contracts that are of the same type and style and cover the same underlying security are referred to as a class of options. All stock options of the same class are referred to as an option series. They have the same unit of trade at the same strike price and expiration date

    Stock vs stock options

    The difference between stocks and stock options is that stocks give you a small piece of ownership in the company, while stock options are contracts that give you the right to buy or sell the stock at a definite price by a particular date. There are always two sides to every option transaction: a buyer and a seller. For every call or put option bought, there is always someone else who is selling it. Many traders think of a position in stock options as a stock surrogate that has a higher leverage and less required capital. They can be used to bet on the direction of a stock’s price, just like the stock itself. But stock options have different characteristics than stocks.  And there is a lot of terminologies that options traders must learn.

    What are Put and Call?

    A call is the option to buy the underlying stock at a predetermined price by a predetermined date. The buyer has the right I explained above. The seller of the call who is also known as the call “writer” is the one who has the obligation. If the call buyer decides to buy, the call writer is obliged to sell shares to the call buyer at the strike price. A call option contract grants its holder the right to buy a certain but specified number of shares of the underlying stock. That right has to be executed at the settled strike price on or before the date of the expiry of the contract.

    For example, you bought a call option on ABC company with a strike price of $40, expiring in two months. That call buyer has the right to exercise that option, paying $40 per share, and receiving the shares. The writer of the call would have the obligation to deliver those shares and receive $40 for them.

    Put options are the options to sell the underlying stock at a predetermined strike price. Until a fixed expiry date. That put buyer has the right to sell shares at the strike price. And the put writer is obliged to buy at that price.

    Calls and puts, individual, or in combination, can provide different levels of leverage or protection to a portfolio.

    What are employee stock options?

    Many companies issue them for their employees. When used appropriately, these options can be worth a lot of money for you. With an employee stock options plan, you are offered the right to buy a specific number of shares of company stock.

    All employees’ options have a vesting date and the expiration date. It’s impossible to exercise these options before the vesting date or after the expiration date.
    You’ll recognize two types of stock options companies issue to employees:

    NQs – Non-Qualified Stock Options
    ISOs – Incentive Stock Options

    With a non-qualified type, taxes are taken from your gains after you exercise the options. However, keeping too much company stock is considered risky. For example, if the company has financial problems, your future financial security could be in danger.

    When long-term investors want to invest in a stock, they usually buy the stock at the current market price and pay full price for the stock. An alternative is to use stock options. Buying them allows you to leverage your purchases. Far more than is possible in even a margined stock purchase. In several investment situations, it might make sense to invest in stock options. Hence, rather than the underlying stock. Note,  the basic fact of stock options trading. You are highly leveraging your investment. And it means your investment risk is also substantially increased.