What are Stock Options? Everything You Need to Know

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Confused about what Employee Stock Options actually are? Today is your lucky day.

Employee Stock Options (or ESOs) aren’t just a perk you get at your job. They represent real value—real cash value. And if you know how to use them, you could make TONS of money.

But because stock options math is so complex, it’s the constant source of confusion for many employees, but we have a way to make it easy and understandable.

Read any number of articles about it, and you’d think you need a finance degree to understand it, let alone use it to your advantage. Thankfully, stock options aren’t that hard to understand. And they’re the secret behind building considerable wealth and retiring early. (We’ll cover this later.)

Let’s begin.

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What are stock options?

Stock options give you an option as an employee to buy a piece of the company you work for. More specifically, it’s an option to buy a set number of stocks at a set price, at a set future date.

Companies give out stock options on top of salaries as a bonus to keep you motivated to perform. Why stock options and not a higher salary? Because it’s more beneficial for both you and the company.

For example, if you work hard and help the company’s profits to rise, then the value of the company will go up. That means that its stock price will go up. So when you sell your stocks, you will make a profit.

But you’re on the hook.

There is no way to guarantee that your options will equal money.

Second, you can’t exercise your options until your vesting date.

And third, how do you predict the company’s future value and actual exit?

GrowthAdvisor is the only company that can predict the value of your employee stock options up to 10 years into the future.

But don’t fret. We’ll cover this in detail later.

Before we get that good stuff, let’s tackle the following question.

If employee stock options are so uncertain, why even own them?

Why should you own stock options?

When an early Google employee—a masseuse—cashed in most of her stock options, she became a millionaire.

Though when she first got her job, she thought her stock options would be worthless. But because she stuck with it and stayed at Google for five years, she made a TON of money.

Of course, not everyone is so lucky. But stock options can be used to build considerable wealth if you know how to use them. On the flip side, if they expire, they’ll be worthless (more on that later). This is why stock options are crucial to your income.

Own stock options, cash in at the right time, invest in a mutual fund and watch your money grow as a huge snowball pushed down the hill. We like to call this “Fast Growth Snowball Track.”
Or don’t own stock options, have no extra cash to invest in a mutual fund and watch your money barely grow-more like a tiny snowball pushed down the hill. We like to call this “Slow Growth Snowball Track.”
This need for income growth confines you to the endless “rat race.” You have to keep working for money, to make more money. The moment you stop working, your income drops.
That’s exactly why you should own stock options. They’ll help you:

  • Save years: Instead of working for money, make your money work for you and retire early.
  • Create passive income: You can only work for so long. Owning stock options is your best chance to generate massive amounts of extra cash that you can invest and watch it double every 7 years.

That’s what we do at GrowthAdvisor. We show you the accurate value of your stock options, how it will change over time when to cash it in, when and how to negotiate salary and more stock options, and which companies will give you the best and the biggest compensation package overall.
Plus, every time you’re due for a promotion, we tell you how to ask for more stock options. And every time you get a new job, we tell you how to negotiate a bigger compensation package.
Zillow wealth Guide Now that we answered your burning question “What are stock options?” Let’s take a look at what types of stock options there are.

What are the types of stock options?

All stock options fit into four buckets:

  1. Incentive Stock Options (ISOs);
  2. Non-Qualified Stock Options (NSOs);
  3. Restricted Stock Units (RSUs);
  4. Restricted Stock Awards (RSAs);

It sounds like a mouthful, we know. But they’re quite easy to understand.

The main differences are in how they’re taxed and when you can exercise them (another way of saying “when you can use them to buy stocks”).
Let’s look at each one.

What are Incentive Stock Options (ISOs)?

Incentive Stock Options are the most common type of stock options. If you own stock options, that’s probably what you have. IRS considers ISOs as statutory. That means the difference between the Strike Price and the Exercise Price is taxed as a capital gain (see more below). So you pay less in taxes.
Want more details? Read this ISO definition.

What Are Non-Qualified Stock Options (NSOs)?

Non-Qualified Stock Options are not recognized by the IRS as statutory, so you have to pay income tax on the difference in price. That is the difference between the original Strike Price and the price at which you have exercised your options. Since the ordinary income tax is higher than capital gains tax, you end up paying more in taxes.
Want more details? Read this NSOs definition.

What are Restricted Stock Units (RSUs)?

Restricted Stock Units are pretty much the same as other stock options, except their value is assigned to them when they vest, NOT before (like in regular options). One other difference: while stock options are an “option” to buy company shares, RSUs are a company’s “promise” to give you the option to accept the shares. Hence, the word “restricted.”
Want more details? Read this RSUs definition.

What are Restricted Stock Awards (RSAs)?

Restricted Stock Awards are very similar to Restricted Stock Units, except they are “awarded” so you get them right away (no need to wait for a vesting date).
Want more details? Read this RSAs definition.
Want to learn even more about the types of stock options? Then read this and this.
Now, let’s move on to stock options basics.

Stock options basics

Let’s take a look at how stocks work. If you read your Stock Options Plan, you’ll see phrases like “Vesting Schedule” and “Strike Price” and the like. Here is what they mean.

What is a Strike Price?

A Strike Price is the same as a Grant Price. It’s the price at which you can purchase stocks. (NOTE: An Exercise Price is a price at which you exercise your options, as mentioned above.)

For example, say your company grants you (another way of saying “gives you”) an option to buy 12,000 shares (another way of saying “stocks”) at 10 cents per share. This is your Strike Price.

If you look at your Stock Options Plan, you’ll see that you can’t buy shares NOW. You’ll have to wait until your Vesting Date. Which leads us to the Vesting Schedule.

What is a Vesting Schedule?

A Vesting Schedule is the schedule of dates when you can purchase stock. (This is another way of saying “exercise stock options.”) Simply put, the word “vesting” means you can NOW exercise. And the word “exercising” means you pay NOW (or for RSUs, it means you accept NOW) and so you own shares.

Typically, it’d be four years before you can purchase stock—purchase all the shares in your grant. That’s a good amount of time for the company to keep you motivated to stay and to help it grow.

Also, it’s called a schedule because your shares start “vesting” after a “cliff” (about six months to a year), and then you get some percentage of your shares every month (or every six months) until the end of the vesting schedule when all the shares are vested.

What is an Expiration Date?

An Expiration Date is a date when your stock options expire. It means that you absolutely have to exercise your options before that date. Or they’ll be gone. Poof! Expired.

What are the rewards and risks of stock options?

Stock options can be worth millions. But they can also be worth nothing.

To maximize the rewards and minimize the risks, you need to know the likelihood of your employer’s success. After all, you don’t want to accept a smaller salary and a bigger Employee Stock Options amount only to realize four years later that you slaved for nothing.

In other words, why accept a lower salary at a company you’re not sure will succeed (and so its stocks might be worthless)? Why not pick a company that can generate you a considerable amount of cash down the road because of a successful exit?

That’s exactly what we do at GrowthAdvisor. We find the best companies for you, predicting the likelihood of their successful exits.

GrowthAdvisor is the only product that can predict the exit of any company up to 10 years into the future. Use our Option Price Calculator to see how much your Employee Stock Options will be worth if your company goes public vs. if it gets bought.

How to get more stock options?

Now that you know how wonderful Employee Stock Options really are, let’s talk about how to get more of them.

There are three ways to do it (and GrowthAdvisor can help you with each):

  • Negotiate higher overall compensation at your current job;
  • Negotiate a large number of stock options when getting a new job offer;
  • Switch to another company that offers more stock options;

Simply use our Negotiation Chart, and you’re golden.

When to exercise stock options?

As we mentioned above, stock options have a vesting schedule. But you don’t need to exercise all your options on the vesting date. You can exercise some. Or you can choose to not exercise any at all.

Why? Because you can choose to hold on to them like that Google masseuse did. Wait until their value goes up, and then purchase stock. Then turn around, sell the stock and pocket the difference. And then invest and prosper.

Once again, use GrowthAdvisor to set up Valuation Alerts. We’ll tell you how long you need to hold your stock options. And we’ll tell you when to exercise them, to make the most money.

How to use stock options to retire early?

Let us introduce you to our method that we like to call the “Snowball Technique.”

The idea is simple. Think back to the time when you were a kid. Did you ever roll a snowball down a hill, to make it pick up more snow so it could get HUGE? If you didn’t do it yourself, you probably heard a story about another kid who did it.

The idea is simple.

If you invest $100,000 in a mutual fund, in about 7 years your money will double. And in another 7 years, it will double again, getting you to $400,000. It’s like watching your snowball grow bigger because it picks up more snow.

But if you invest only $1,000, then in 14 years you’ll have only $4,000. That’s like watching a tiny snowball pick up very little snow.

How do you get from investing only $1,000 to investing $100,000?

You pick a job at a company that gives you a generous amount of stock options and has the best chance of a successful exit. Simply sign up with GrowthAdvisor (it’s FREE!) and pick any company from our list, and you’re already ahead of most employees.

Here is something even better.

Want to get from earning $40K with your Employee Stock Options to earning $1.6MM? Then read this article (see the “Snowball Technique” section).

Final note

Employee Stock Options are a secret way to get you to prosperity. (Okay, maybe not such a secret way, but you agree that their earning potential is often overlooked.)

Yes, they could be worthless. But they could also be worth A LOT.

With a little bit of planning and a little bit of help from GrowthAdvisor, you can get the compensation you deserve and the future that you dream about.

Ready to get started?

Increase your earnings with GrowthAdvisor

Monitor your Employee Stock Options value, compare salaries at over 800,000 companies and get tips on how to increase your earnings.

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Next Steps
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Check out our post on how stock options can skyrocket your wealth ⟶

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