It’s common for tech industry employees to be compensated with stock options. Stock options are complicated and many engineers I know are terribly naïve about how they work. But options are often the most valuable part of an employee’s compensation! This engineer’s guide to stock options is good reading.

Here are some basic questions every owner of stock options should ask their employer. With these answers an accountant can work out the value of the option package and plan a tax strategy.

  1. How many shares of the company will I own?
  2. How many shares of the company exist?
  3. What percentage of the company will I own?
  4. What is the strike price of my options?
  5. What is the fair market value of the stock today?
  6. Can I early exercise my options?

Many companies are reluctant to answer #2 and #3 (they are equivalent). Trying to keep an employee in ignorance about this is bullshit. Knowing what percentage of the company you own is the only way to evaluate your option package. Companies will generally answer this question if you press hard enough; if they refuse, it is a very bad sign.

Tax strategy is important for several reasons. Early exercising could save you ~20% in taxes later on. But even more importantly, early exercising could save you 100% should you leave the company. Most option agreements include a clause where your options disappear 30 or 90 days after you stop being an employee. If you quit and can’t afford the taxes to exercise those options, you can lose everything. Planning ahead matters.

  2015-03-27 16:40 Z