Key Investment Services > Employee Stock Options
Employee Stock Options
Stock options are a form of compensation given to employees from his or her company. Stock options provide the employee the opportunity to purchase stock in the future at a specific price. Benefits for employees include the opportunity to share in the company's success and purchase company stock with no risk of personal capital.
Two Types of Stock Options
Strategies To Consider When Exercising Stock Options
Cashless Exercise and Sell Stock — By exercising your stock options and immediately selling the optioned shares, you do not have to use personal funds to execute the transaction. The option cost, applicable taxes, and applicable fees are subtracted from your sale proceeds and you will receive the net amount in cash.
Cashless Exercise and Hold Stock (a.k.a. Sell To Cover) — This strategy allows you to sell just enough shares to cover costs while retaining the remaining shares to become a shareholder in the company.
Cash Exercise — You can elect to exercise your stock options and retain the shares. You would be responsible for paying the option cost and applicable taxes, and then your employer would deliver the optioned shares to you. You would then have the same benefits as other shareholders.
Restricted Stock Awards
Restricted Stock Awards are a form of compensation given to employees from their company. An employee's right to the Restricted Stock Awards are limited until the shares "vest" and cease to be subject to the restrictions. Typically, the employee may not sell or transfer the shares of stock until they are vested. Once the shares are vested, an employee will own the shares outright and may treat them as any other share of common stock.
Stock Appreciation Rights (SARs)
Stock appreciation rights are designed to provide employees with the benefits of stock ownership without any actual transfer of stock occurring. A SAR is a grant to an employee giving the employee the right, at some specific time in the future, to receive a cash award equal to the appreciation in value of a certain number of shares of company stock. SARs are similar to stock options but differ in several respects. Exercising stock options requires the employee to purchase the underlying stock at the grant price, SARs require no cash outlay from the employee, giving the employee only the appreciation in value of the stock. If structured properly, there are generally no tax consequences to the company or employee upon the grant of a SAR. Tax recognition by the employee is generally deferred until the employee receives the value of the award. The employee may be responsible for any tax consequences that result in the exercise of these shares.
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