This guide aims to help you understand what's at stake. From stocks to RSUs, we break down the key considerations to help you make an informed decision. Let's dive right in.
Equity Types
Stock Options
What are Stock Options?
Stock options give you the right to purchase shares of your company's stock at a predetermined price, known as the "strike price."
Advantages
- High Upside: You stand to gain a lot if the company's value rises.
- Timing Control: You decide when to exercise your options, allowing you to wait for favorable tax circumstances.
Disadvantages
- Market Risk: If the stock price falls, your options could end up worthless.
- Complexity: Options come with various rules and tax implications.
Key Aspects to Consider
- Strike Price: This is the price at which you'll buy the stock. A lower strike price generally means higher potential profits.
- Vesting Schedule: Typical schedules might span four years with a one-year cliff. This means you can't exercise any options until you’ve been with the company for at least one year.
- Expiration Date: Options expire. The most common term is 10 years from the grant date.
- Early Exercise: Some companies allow you to exercise options before they vest, providing potential tax advantages.
Restricted Stock Units (RSUs)
What are RSUs?
RSUs are company shares that you receive over time, usually through a vesting schedule.
Advantages
- Less Risk: Unlike options, RSUs have value regardless of stock price fluctuations.
- Simplicity: RSUs are straightforward—no need to decide when to buy.
Disadvantages
- Taxation: They're taxed as income, often at high rates.
- Lack of Control: You have less strategic control over tax outcomes compared to stock options.
Key Aspects to Consider
- Vesting Schedule: Like options, RSUs typically come with a four-year vesting schedule with a one-year cliff.
- Sale Restrictions: Companies may place restrictions on when you can sell vested shares.
Employee Stock Purchase Plans (ESPPs)
What are ESPPs?
ESPPs allow you to purchase company shares at a discounted rate, usually through payroll deductions.
Advantages
- Immediate Profit: The discount provides an immediate return on your investment.
- Simplicity: No complex decisions about when to buy or sell.
Disadvantages
- Market Risk: You're buying at market price, so shares can decline in value.
- Limited Window: Purchase periods are usually restricted.
Key Aspects to Consider
- Discount Rate: The rate could be as high as 15%, making the ESPP very attractive.
- Offer-to-Purchase Period: Understand the frequency and duration of these periods to plan your finances.
Core Concepts and Vocabulary
- Vesting: How your equity becomes yours over time.
- Cliff: A period you must pass before vesting begins.
- Dilution: Additional shares can be issued, reducing your percentage of ownership.
- Market Capitalization: Total market value of all of a company's outstanding shares.
Assessing Equity Offers
- Type of Equity: Different types come with different risks and opportunities.
- Percentage Ownership: The fraction of the company the equity represents.
- Fair Market Value: Compare your equity’s value against the current market conditions.
- Potential for Growth: Research the company’s growth prospects.
Tax Considerations
- Capital Gains: Profits taxed at a lower rate if assets are held for over a year.
- Alternative Minimum Tax (AMT): Exercising stock options may trigger this tax.
Final Thoughts
Equity can be a significant part of your compensation package. It has the potential for high rewards, but it's important to understand what you're getting into.
And remember, always read the fine prints ;)
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