Benefits & Leave 7 min

How to understand your employee stock options: an employee’s guide

Written by Francesco Cardi
April 18, 2024
Francesco Cardi


share to linkedInshare to Twittershare to Facebook
Link copied
to clipboard

Employee stock options are a highly attractive benefit. They give you a direct investment (literally!) in your employer's future, and can be well worth their weight in gold.

However, employee stock options are not straightforward — especially if you are based in a different country to your employer. Understanding them can be quite complex.

In this article, we'll aim to break that barrier down. We'll explore what exactly employee stock options are, how they work, and what you might expect to receive.

So let's dive right in.

What is an employee stock option?

Employee stock options are a form of equity compensation. They allow you to buy company shares at a pre-set price (known as the strike price or exercise price) within a specific period known as the exercise window. Opting to buy shares at this special price is known as exercising an option.

Companies award options through grants, which cover the details of the agreement. These include:

  • The grant date: the day you receive the options.

  • The number and types of options granted: how many (and the kinds of) shares you can buy

  • The strike price: the pre-set price at which you can buy shares

  • The vesting schedule and exercise window: the timeline for when you can start buying the shares, and for how long you have to make their purchase

  • The expiration date: the last day on which you can buy shares

  • An explanation of what happens if you leave the company, or if the company changes hands

It's important to note that when you hold a stock option, it doesn't mean that you own actual shares yet. Instead, it's an opportunity to buy or sell them at a pre-set price within the given timeframe.

Some companies also offer a reload option, allowing you to buy more employee stock options.

What are the benefits of employee stock options?

Employee stock options give you a chance to own a slice of the company you’re helping to build. However, before you can “cash in” on this offer, you need to stick around for a certain amount of time. This is known as the vesting period.

Once the vesting period is complete, you can convert your options into actual company shares (usually at a much lower price than the market rate).

This is one of the reasons why they are such an excellent benefit. You get a great incentive, and it encourages your company's top talent to stick around. It’s a win-win in a broader sense, too: the better you — and, by definition, your company — performs, the more everyone’s shares are worth.

What stock options are available for employees?

There are several types of stock options, such as:

Incentive stock options 

Incentive stock options (ISOs) are usually offered to key employees and top management personnel. If you don’t sell these shares within a year of exercising, you may have to pay an alternative minimum tax (AMT).

Non-qualified stock options

Non-qualified stock options (NSOs) can be granted to employees at any level of a company. However, you must pay taxes when exercising and selling. In the US, your employer reports the difference between the market price and exercise price as income on Form W2, and it’s taxed as regular income.

In addition, you must pay:

  • Short-term capital gains tax on any shares sold within one year of the exercise date 

  • Long-term capital gains on shares sold after one year of the exercise date

Employee stock purchase plans

Employee stock purchase plans (ESPPs) are company-run programs that allow employees to buy stock at discounted prices. You contribute to the plan through payroll deductions, which accumulate until the purchase date. Your employer then uses those funds to buy a specific number of stocks on your behalf, at a price up to 15% lower than the market price.

Performance shares

Performance shares are designed to reward employees when they perform well. They are only granted once you hit certain performance targets within a given period of time. They’re an incentive-based form of stock compensation, encouraging team members to not just meet benchmarks but exceed them.

Restricted stock units

Restricted stock units (RSUs) can be seen as a future piece of your employer's pie, served up once you meet certain milestones. Initially, these shares are just a promise. But once you meet the conditions, they turn into real value and are counted as income (with taxes taken out upfront). After the vesting period is up, what’s left of the remaining shares is yours to sell or hold.

How does an employee stock option plan work?

Companies that provide stock options often do so through an employee stock option plan (ESOP). Here's how it works.

When you are hired by your company (or, if the plan is conditional, when you become eligible), you will receive a written option to buy a specific number of shares at a strike price. You will also be given a vesting schedule (usually around four years).

For example, your employer may give you an option for 400 shares with a four-year vesting schedule, with 25% of the options vesting each year.

This means that, each year, you'll be able to exercise 25% of your options (i.e., 100 shares) and purchase them at the strike price. Of course, whether or not you want to do so is up to you.

If you do opt to purchase, you can then hold your shares or sell them. If the company's stock price increases above your strike price, you might opt to sell them for a profit.

Ensure that you exercise your options by the expiration date, though. Otherwise, you will lose the opportunity to purchase at the strike price.

Can independent contractors receive stock options?

Although there are potential misclassification risks, it is possible for companies to offer equity incentives to independent contractors.

To do this compliantly and effectively, it’s recommended to work with a global HR partner, like Remote. We can help you and your clients navigate securities laws, tax regulations, and employment classifications — wherever in the world you are both based.

link to How to offer stock options to independent contractors

How to offer stock options to independent contractors

Understand when you can offer stock options to an independent contractor, and discover how to offer them compliantly with our expert guide.

Manage your employee stock options with Remote

Stock options are an excellent benefit for both employers and employees — but they can be complicated and difficult to manage. This is especially true if you are based in a different country.

Remote can handle all of this for your employer. We have years of experience helping global companies incentivize distributed teams, and our local, in-house experts understand how employee stock options work around the world. 

To learn more about employee stock options — and how your employer can provide and manage them with ease — get them to speak to one of our friendly experts today.

Subscribe to receive the latest
Remote blog posts and updates in your inbox.