Since the pandemic, the new normal has been staying indoors, gradually causing layoffs to employees. Industries are letting go of employees because of financial uncertainties affecting startups in most cases. Gaining financial freedom and stability is the dream of every startup employee, but this is a step by step process.
The best thing nowadays is that many startup employee stock options can help them handle equity. You need to understand the risks involved, time frame, and many factors to consider before you exercise stock options. These factors are easy to understand; hence you can get more details from this article.
As an employee, you play the role of contributing to a company's success, but the motivating factor for many employees is equity. After working for some years in a company, you can transform the equity to wealth quickly. Equity contributes to the total net worth for employees, and it's also essential to exercise stock options. With vested stock options, you can have something to hold on to after the layoff.
From financial advisors like Charly, after sudden layoffs for startup employees, the only thing that comes to mind is their equity. That is why employees should beware of methods of managing equity. An employee should know their type of equity, tax implications, the process of exercise, and the time frame needed to exercise the equity.
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Here’s What Employees Need To Know About Equity And To Exercise Stock Options:
Generally, there are equity compensations that employees can get after a layoff. These include restricted stock, vested stock options, and ESPPS, which entails the employees' stock purchase plan. When it comes to stock options, there are incentives and non-statutory stock options. When it comes to restricted stock, there are units and awards types of compensation. That is why employees need to know and understand each type of equity compensation due to the widespread pros and cons.
With vested stock options, employees earn the right to buy any shares from a company following a certain vesting period. With all the stock options, employees get the advantage of leverage, and that is why companies attract or retain employees using this strategy. You can only qualify to exercise stock options once they become vested stock options.
Many employees find the restricted stock to be more upfront because you either get it or not. It may be confusing when it comes to differentiating the two types of restricted stocks. When it comes to the unit, employees get shares from the employer's stock to meet set conditions. In restricted awards, employees have to buy shares when they are granted.
How Does A Startup Employee Identify Their Equity?
Employees should agree with the employing company on their stock options soon as they sign their employment contracts or slightly after they report to work. These options for most companies are referred to as stock option agreements. It is usually recommendable for startup employees to be read and understand this agreement, but it is best to seek clarity from the relevant department in case of uncertainties.
Some terms come in line with this agreement, but it enables employees to know things like; the vesting time frame and the duration one should work to vest stock options, exercise rights, and the ability to exchange them to shares. These terms usually vary.
Exercising stock options and time frame:
When it comes to vested stock options, employees need to know certain things about the exercise window, schedule, and time frame. Companies have various exercising windows. In most cases, employees have a window frame of ninety days to exercise their stock options. However, this is all dependent on different company policies. Long time frames help employees to access and understand the stock options before exercising. They also get a clearer understanding of stock options during this time frame.
As a startup employee in a company, you should be aware of startup companies' high risks. The main thing that affects the value of an employee’s shares is the success rate of a company and market fluctuation. Due to these reasons, shares may diminish in terms of cost or increase from time to time.
Tax Implications In Exercising Stock Options:
After deciding on startup employee stock options, you need to understand the tax implications of exercising that stock option. For Incentive/Qualified Stock Options, independent contractors cannot access them but are only granted to employees. When it comes to Non-Statutory Options, non-employees can access it. The common thing about these two is that tax is imposed on a fair market deal. For ISO's, taxes only imply after an employee sells the stock, unlike NSO's where taxes apply soon as they exercise their stock options.
In most case scenarios, employees should talk to a tax advisor to get better advice on the best method.
Take note of these tax factors as you exercise stock options;
In NSO's, average income tax rates apply.
For ISO, the tax rates are favorable.
Can A Startup Employee Afford To Exercise Stock Options
Just like all investments have risks regarding vested stock options, you have to consider the risks involved as you continue with the decision making process. You can pay for the tax and stocks using money but keep in mind that these are an illiquid investment. In such an investment, you can only gain value for the stock, but you can get access to the cash later. Weigh your financial stability options before getting into such investments.
As a startup employee, you may lack funds to buy the stocks there and then, especially after a layoff. If you are a startup employee, you can consider these options after a layoff;
You can use your savings or borrow from family and friends if you do not have high equity. Most startup employees go for this option, and they can attain their financial goals when exercising their stock options.
You can get capital from some companies such as Equitybee. They will enable you to get the funding you need in order to exercise stock options easily as long as you the startup meet their requirements.
You can read more about Employee options platform.
You can get a loan, but you should know that they are paid with interest despite the profits you gain from the shares.
Rewards Of Vested Stock Options:
From social media platforms, you can understand how stock payouts work after exercising stock options. As long as you own stock in a profitable company, you get lump-sum amounts that can recharge your financial status. That is how you can buy your financial freedom and experience a life-changing situation.
The pandemic times are quite challenging, especially for startup employees who wish to venture into vested stock options. Many employees have been missing out on many stock options after employment layoffs, but these opportunities are available anytime. After the pandemic, you can use your equity to venture into other investment options. The main thing startup employees should keep in mind is to stay confident and optimistic during these challenging times. Always go for the best stock options, even if you are a startup employee.
