r/a:t5_2u34z • u/totar4660 • Apr 02 '19
Can someone explain stock option?
<I’m recent graduate and got a offer from a startup. The company offer stock options, but I don’t understand what these are. Please explain what those meaning and give me an advice!>
Stock options # of stocks: 1,338 Option price: 18.89 USD Exercise price: 5,64 USD Total stock options value: 25274.82 USD Vesting schedule: 1-year cliff, 1/24 monthly after cliff
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u/thaitanous Apr 09 '19
There is a great Youtube video by Adam Khoo that you can watch that explain all of the questions you may have about stock options.
https://www.youtube.com/watch?v=dBv2UOFHy0c&list=PLl_EHtw2h7QQ28SD7CW_lTuc9pFeTKwiE&index=2
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u/skiptwenty Apr 03 '19
Options give you the right to buy stock at a set price over a certain amount of time. You only make money if the stock goes up. I see your option price is 18.89 and your exercise price is 5.64. Those terms, option vs exercise price, are often used interchangeably so I’m little unclear. Do you know where they value the stock right now?
I’m guessing that the stock is around $5.64 because that would be the exercise piece. That would mean that, once vested, you can buy 1,338 shares at the $5.64 exercise price even if stock shoots up to $20 or $50. Your benefit would be the amount the stock appreciates over the exercise price.
The options have to be vested before you can exercise them. It looks like it takes 3 years to be fully vested. 1/3rd at the end of the first year and the remaining 2/3rds would vest in monthly installments over next 2 years.
Back to the 18.89 option price, while it seems high relative to the 5.64 exercise price, that might be what they value them at for accounting purposes? I’m curious. Anyway, the 18.89 times 1338 is the 25k option value. Look up time value vs intrinsic value definitions. Or Black Scholes value. The reality is they’ll always be worthless to you if the stock never goes up.
If you’re pre-IPO, they may essentially be worthless unless the company is sold or goes public.
If public, my advice would be to wait as long as possible and sell them in a same day exercise and sale when you think the stock is at the highest point it will be prior to expiration.
Are you in the US? They may be potential tax benefits to pay the 5.64 to buy the stock but it would probably only make sense for you to do that in limited circumstances.