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The company gives you some stock options. You may wonder: What is stock options? What are they for? What should I do now?
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First of all, congratulations! Although stock options won’t make you rich, they won’t hurt you if you don’t do something crazy.
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Stock options: grant stock options to some employees who have made important contributions to the development of the company to encourage them to better promote the development of the company. Behind the stock option incentive system, it is often a successful commercial project. Employees holding options have the right (but not necessarily) to purchase company shares at a predetermined price (exercise price), and can exercise this right within a certain period of time (generally five to ten years). Until the end of the term, if the right has not been exercised (that is, it has not been used to purchase the company’s shares), the option will become invalid.
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Why is an option a good thing? It is undoubtedly a pleasure to have the right (but not mandatory) to buy the company’s shares, because you do not need to make any investment and do not put your money at risk to participate in the appreciation process of the company. For example, if the option agreement price of the company’s shares (at which you have the right to subscribe) is $1 per share, and then the share price rises to $11 per share, you will get a profit of $10 per share. If you subscribe 1000 shares, the stock value will increase to 10000 dollars, which is certainly a good thing.
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Option income is taxable. When you exercise an option, the I.R.S. will usually tax you. Taxable income is different from the market value and exercise value of shares. In the above example, if the share price is $11 and the exercise price is $1, the taxable income is $10 per share. Even if you do not sell these shares, you will also have to pay tax. Because this part of income is higher than your other income, the tax department will tax according to the marginal tax rate, which may be the highest of all tax rates you pay. If you consider both state and federal taxes, the marginal tax rate will easily account for one third of your option income.
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Exercise the option when you sell the stock. It is a good way to exercise options when you are ready to sell shares (i.e., to subscribe for shares with your options). Remember, although equity is free, when you are really ready to buy shares, you need to buy them with cash unless you are ready to sell them. Therefore, wait until you are ready to sell the stock before exercising the option. Generally speaking, if you are ready to sell your stock right away, the company will work with the stockbroker to arrange for you to exercise the option without having to invest money. You can use the cash saved to pay the taxes payable.
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Exercise options at maturity. The expiration date of the option is the last time for you to exercise the option. If you cannot sell your shares (the company is an unlisted company and no buyer buys your shares), but still want to exercise options, you can do so by auction. If your options are about to expire, but you think there is still a lot of room for the company’s share price to increase, you can exercise the options and use your own money to buy these shares. Remember, you need to pay not only the exercise price, but also the tax.
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If your salary is high and the option value may be tens of thousands, be sure to consult your tax adviser before you exercise the option.