Worthless employee stock options

Your source for data-driven advice on investing and personal finance. See how Wealthfront can help you reach your financial goals. A few years ago, as I was delivering a job offer to a candidate at my previous employer LinkedIn , I received a question that surprised me. He had already asked the key questions necessary to evaluate his offer — including those previously covered in the 14 Crucial Questions About Stock Options — but now he had one I had not encountered before:.

It was an intriguing question. LinkedIn was a public company at the time, so employee insider trading rules aside, you could theoretically buy exchange-traded options on LinkedIn stock. So was there anything special in the employee stock options we were offering the candidate? Were employee stock options worth it relative to buying the same options on the exchange? The answer came down to the key differences between employee options and exchange-traded stock options.

When talking about employee stock options on this blog, we frequently focus on elements such as the vesting schedule , or perhaps the percentage of company ownership the options represent.

But an important attribute of employee stock option plans frequently goes unnoticed — the time until the options expire. Employee stock option plans generally set expiration at 10 years post grant something you should be able to find buried deep within your employee stock option plan. However, you can still lose your options if you wait to exercise beyond the expiration date. So why does this matter? The longest expiration exchange-traded options known as LEAPS typically expire in no more than two years.

4 Reasons Why Startup Stock Options are Usually Worthless – David Cummings on Startups

As of August , for example, the longest expiring option you can buy on LinkedIn stock expires in January of — just 1. It also turns out that the longer the option has until expiration, the more valuable it is. What happens in this example if your options expire in 1.

Options with a longer time until expiration have a lower probability of expiring worthless and thus a higher probability of profits.

You can see this effect in the price of exchange-traded options. As you can imagine, this means your employee stock options — that expire in 10 years — are much more valuable than even the longest-expiration exchange-traded options that expire in two years or less. The same is not true for exchange-traded options. Even if you ultimately choose to commit capital to exercise your employee options, you can choose to do so only when it will result in a profit.

Employee stock options can immediately earn a profit when the stock price rises above the option exercise price. The risky nature of exchange-traded stock options highlighted above also means that trading such options is not as easy as you might think. Because exchange-traded stock options carry a significant risk of losing all the money you invest, you typically need to go through a special approval process with your broker in order to trade them.

In fact, gaining the ability to purchase call options the closest technique for replicating the performance of employee stock options typically requires Level 2 option trading approval.

That type of approval does not come without an application process and typically requires significant experience and knowledge in option trading before it can be granted.

So just buying exchange-traded options is still no easy task even if you were okay with the trade-offs between employee stock options and exchange-traded options highlighted above. Luckily, employee stock options, with no requirement to invest capital or any risk of capital loss, do not come with any such restrictions.

Understanding Employee Stock Options - umypecodayok.web.fc2.com

When I explained these differences to the candidate, he quickly recognized the error in his question and soon afterwards accepted the offer to work at LinkedIn. We hope that you too recognize the unique value that employee stock options can bring to your job compensation. Employee stock options can be an incredibly powerful way to build your assets for the future as long as you choose the right company, ask the right questions , and, if you are at a private company take advantage of techniques such as early exercise.

Disclosure Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security. Financial advisory services are only provided to investors who become Wealthfront clients.

Past performance is no guarantee of future results. There is a potential for loss as well as gain that is not reflected in the information presented.

Compensation: Incentive Plans: Stock Options

Be aware that trading options will require you to complete an options agreement with your broker, and may require prior investment experience. You should carefully review the risks associated with trading options prior to any transaction.

He joined Wealthfront from LinkedIn, where, as Sr. Director of Product Management, he also oversaw much of the consumer product experience, including Profile, Search, Endorsements and People You May Know.

Previous to LinkedIn, Elliot held technical and leadership roles at eBay, About. Elliot holds an MBA from Stanford Graduate School of Business, where he was an Arjay Miller scholar, and holds a BA magna cum laude in Computer Science from Harvard University.

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Wealthfront Knowledge Center Your source for data-driven advice on investing and personal finance. An important attribute of employee stock option plans frequently goes unnoticed — the time until the options expire.

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