Can someone explain to me how options work?
Sorry for the dumb question. Hence blind. I have an offer from a startup that has IPO'd in the biotech space. $100k base 40% bonus 10,000 options. Right now the stock is trading at $10. In order to exercise the options do I need to pay $10 per stock? So in order to get my payout I'd have to pay $100k? Sorry can someone explain this to me like I'm 2 yrs old?
When you are actually exercising the options “the price at the time of exercising” minus “the price agreed on contract” will be paid to you.
I don't think that's accurate. When you exercise, you pay the agreed strike price and pay any potential taxes (AMT) on the spread of your income (fair market value - strike price). Exercising comes before selling. You can also exercise and sell on the same day which is what you are referring to.
What’s your strike price on these options
I didn't ask, but for the sake of explaining it to me let's say $10
For a vanilla option the three essential parameters of an option are the "strike price", "exercise price", and whether it is a "put" or "call". You have a call. If strike price is 10 that means you have "the right but not an obligation" to buy the stock for 10 on the expiry date. So for example if at the expiry date you have an option with strike price of 10 and the stock price is 100, that means you can buy the stock for 10 (and if you sell it for 100 you have 90 profit). If the stock price was 1 instead of 100 in that example you would not exercise your right to buy the stock at 10 because that would be stupid. So the option is worth 0 if it expired today. The thing to notice here about options is that they are one sided, an upside without a downside. That's why there is a premium to enter in such a contract. However as an employee you probably received it as part of your compensation. Also there is a special property of American options that allows you to exercise (aka buy the stock for the stock price) anytime before the exercise date if you wish. Most likely your exercise date is far in the future but you definitely want to "exercise" the option before or on that date (or it is interpreted that you did not want to exercise your option, so it is worth nothing)
Options mean you have the option to buy a certain amount of stock at a pre set price regardless of marker valuation. You need to have the money to buy the stock as you will be ask for funding when you “exercise” the options
So... I would need to find $100k to ever exercise this? How do people usually do this... Isn't that a lot of money to just get your fair share?
If the strike price is $10, as agreed when you joined, then yes you’d have to pay $100k to exercise the options. But say a year from now the stock price is $100, you’re still paying $100k to exercise the options for something that’s then worth 1 Million. So at that point after your exercise the options, you’ve paid $100k and if you sell your shares, that’s when you actually make the money.
I have a similar case wherein I have been offered 11000 options, but at a strike price of $0.52. If I were to leave this start-up before it goes IPO, how would it work? Do I get nothing? *noob alert*
Not super helpful info: https://www.fidelity.com/products/stockoptions/exercise.shtml You can exercise and sell to cover or exercise and sell, and you don’t pony up. Talk to your CPA about tax implications. There’s different tax implications based on when you exercise versus sell. So bottom line: No. you don’t need $100k to exercise, but you will get far less than you might expect. If the stock is trading for $12, then you’d be paying $100k for $120k in stock. 100k goes to the strike price, so if 22% is held for income tax on the $20k appreciation you get $15,600 cash if you sold all shares. Doesn’t feel great. If you exercise at a different time than you sell, you pay capital gains taxes on the difference between exercise price and sale price. Ideally you exercise at 10.50, then sell 2 years later at $1000 and pay long term capital gains on the $9,895,000 difference between exercise and sale.
So how do I compare my RSUs with Options to determine if this is a good offer? Let's say base and bonus are the same. $150k RSUs at Microsoft vs. 10,000 Options at $10 strike price
So in today’s price for msft 150k you would be given ~1350 stock grants. Options are only worthy if the price of your company stock is more than strike price. Only if you don’t plan to hold them to exercise later. So if your company goes public and the trading price is 25$ you would then match it it with msft 150k RSU. You would need to understand the company will be IPO at some point and it’s going to be higher than 25$. As market fluctuates things vary for both. Also you don’t need to have 100k to exercise the options, it will automatically deduct from which ever trading platform is being used. Note., we are not talking about contracts here, just 1:1 options - 1 option equates to 1 stock.
Dumb question: should I subtract the strike price and money I have to front to exercise the options from the market value and compare that to the yearly RSU? Or... Should I be comparing yearly RSU compensation against the total yearly option value?
I broke it down above but maybe not explicitly. Take the difference in strike price and exercise price and that’s how much you are “earning” from your options. Further gains if you don’t sell all the shares immediately aren’t income, they are capital gains. Same as If you hold RSUs after they vest. So if the exercise price is $22/share, you back out $10/share. You earned $12/share, or $120,000.
Can it be split? Like I have 10k and buy 10k worth of option and sell for X and then use that money to buy more options? Considering X > 10k?
Usually options are for companies that do not yet have liquid stock, so the stock is offered at a discounted rate called the "strike price". It doesn't make sense to offer you options at the market rate.
Okay so let's say the strike price is $10. Then I'd need to pony up $100k somehow?
yep, and that would be very shitty