![]() ![]() An option with the same exercise price that expires on Janu(about 14 months later) is valued at nearly $40 per share - some 2.5 times more!Īs you can imagine, this means your employee stock options - that expire in 10 years - are much more valuable than even the longest-expiration exchange-traded options (that expire in two years or less). As of Auga call option on LinkedIn stock with a strike price of $230 that expires on Novem(in about three months), is valued at about $15 per share. You can see this effect in the price of exchange-traded options. You saw some of that in the example above, but there’s actually a mathematical model that proves it.Īs a result, options that are farther from expiration are more valuable. Options with a longer time until expiration have a lower probability of expiring worthless and thus a higher probability of profits. What if the options didn’t expire for four years or more? Then, you could continue to hold those options as the stock price recovers and exercise them in four years to obtain a $50 profit per-share. What happens in this example if your options expire in 1.5 years, before the stock price recovers to $100? Those options expire “underwater” (the current stock price below the strike price) and are thus worthless. About two years after your option grant, the stock price recovers to $100 and four years after your grant the stock price is at $150.Īn important attribute of employee stock option plans frequently goes unnoticed - the time until the options expire. Now maybe your company has a few bad quarters and the stock price drops to $80. Say your company grants you employee stock options at an exercise price of $100. I’ll illustrate this with a hypothetical example. It also turns out that the longer the option has until expiration, the more valuable it is. The longest expiration exchange-traded options (known as LEAPS) typically expire in no more than two years.Īs of August 2014, for example, the longest expiring option you can buy on LinkedIn stock expires in January of 2016 - just 1.5 years away. So why does this matter? Well, it turns out that you can’t buy options with a 10-year expiration on a stock exchange. I’ve actually known long-tenured employees of large public companies who lost some of their stock options this way and others who had to scramble a few days before their 10-year anniversary to exercise their options. ![]() However, you can still lose your options if you wait to exercise beyond the expiration date. Ten years is a long time and for most employees it’s more than sufficient to take advantage of your stock options (even if such options were granted when the company was still private). Employee stock option plans generally set expiration at 10 years post grant (something you should be able to find buried deep within your employee stock option plan). Put simply, the expiration timeframe is the time you have to exercise your stock options to take advantage of your company’s stock price trading above the strike price of your options. But an important attribute of employee stock option plans frequently goes unnoticed - the time until the options expire. When talking about employee stock options on this blog, we frequently focus on elements such as the vesting schedule, or perhaps the percentage of company ownership the options represent. So was there anything special in the employee stock options we were offering the candidate? Were employee stock options worth it relative to buying the same options on the exchange? The answer came down to the key differences between employee options and exchange-traded stock options. LinkedIn was a public company at the time, so employee insider trading rules aside, you could theoretically buy exchange-traded options on LinkedIn stock. Why can’t I just buy LinkedIn options on the stock exchange to capture that upside and just focus my compensation on earning more cash?“ “By coming to LinkedIn and taking these stock options, I’m betting a lot of my compensation on the stock going up. He had already asked the key questions necessary to evaluate his offer - including those previously covered in the 14 Crucial Questions About Stock Options - but now he had one I had not encountered before: The candidate, smart and financially savvy, had come through the interview process convinced that LinkedIn had tremendous upside as a company, but he still wasn’t sure my offer was appropriate. Editor’s note: Interested in learning more about equity compensation, the best time to exercise options, and the right company stock selling strategies? Read our Guide to Equity & IPOsĪ few years ago, as I was delivering a job offer to a candidate at my previous employer (LinkedIn), I received a question that surprised me. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |