Stock Options and Quitting Your Job

After reading this:

• You'll be able to estimate what your share in your company is worth

As with bonus payments , employers issue stock options to their staff to try and tie employees into staying with the company for a set period of time. This is particularly true of younger companies dealing in products or ideas that have a high-risk factor attached to them.

Stock options have recently been in the news a lot because they are used by a lot of Internet companies to hire (and keep) high calibre staff they would otherwise have had problems getting. But its not just Internet companies that offer stock options. The National Center for Employee Ownership in the United States estimates that employees now control 8.3% of total U.S. corporate equity, or $663 billion, up from less than 2% just a decade ago.

Exactly what is a stock option?

Well, there's a whole vocabulary when dealing with stock options but in simple terms, a stock option (also known as a " share option ") is a contract that gives an employee the right to buy or sell (" exercise ") shares in the company at a set price (" grant ", " strike " or " exercise price ") within a certain amount of time ("the exercise period ").

For example, upon starting employment with Company A, you may receive 2000 stock options. The stock options are each worth say £1. Nominally therefore, you have £2000 worth of shares in the firm.

However, you will not be able to trade or sell these options for a set period (set by a "vesting schedule") until the option to realise the value of those shares matures.

On the up side, the stock options which were worth £2000 are now hopefully worth a lot more. If one share in the company is now worth £3, then the value of your shares is now £6000. Remember though that generally, you will have to have worked for the same company for a set period of time before your options can be exercised. This is the how your employer tries to ensure that you'll still be working for the company - the financial incentive to stay may be stronger than your dislike of the boss!

What if I've decided to move on before my options can be exercised?

Your employment contract will tell you how long you need to have to stay with your employer to realise your options. If you are adamant that you want to resign, you may need to negotiate with your boss as to whether you can realise any of the value of your options.

If you've been working at the company long enough to already be able to exercise your options, then you have no problem. Your options cannot usually be taken away from you once you have them and the exercise period has commenced.

Some stock option schemes allow you to trade only some of your shares after a set period with others to follow at a later date. Known as " staggered " or " phased " vesting, you may be allowed to trade say 25% of the shares after the first 12 months with another 25% each subsequent year.

It's up to you of course to choose the best time to sell your shares. For example, you may decide to keep hold of the options if you think the stock will appreciate and you can get a better price later on. Alternatively, there may be sound reasons for exercise early, e.g. you want to avoid moving in to a higher tax bracket or you've lost faith in the company's prospects.

Coming Soon - I-resign.com's Stock Option Calculator

I-resign.com's stock options calculator can help you work out how much your options are worth in both gross and net terms. You'll need to tell us whether you'll be taxed on any money you make as income tax or capital gains tax.