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Employee stock options: What to know

On Behalf of | Sep 30, 2022 | Stock Options

Over the past two years, companies in California have been struggling to find and retain talent. They often train new employees for months or years only for those employees to then go on and find other jobs. This process is enormously stressful and time-consuming for managers and human resources professionals. Stock options are one of the possible solutions to this problem. They offer employees a stake in the company that they work for and give them an incentive to stay there longer.

What are stock options?

They are derivative securities that give an employee the right, but not the requirement, to buy a stock at a particular price. Stock options are vested, meaning that they are only applicable after a certain date. In some instances, they may be issued before a company has even gone public in an attempt to use future stock gains to retain employees.

Stock options are often set at a low price with the idea that employees will be able to sell them later at a higher price and make a substantial amount of money. Since they are options, companies can attach many stipulations to them in order to keep talent engaged and sticking with the company for an extended period. They may also end up being a substantial liability on a balance sheet.

Why are they helpful?

Stock options are essential for attracting and retaining talent. They help ensure that employees have something else to strive for in addition to their salary. Options give companies more flexibility than simply offering stock or a permanent stake in the company through formalized profit sharing.

In addition, stock options give employees an incentive to take action that will help boost the company’s stock price. Finally, they help a company appeal to dedicated employees who are also savvy investors and want to work their way up, eventually, to ownership. Retaining these employees is essential to ensuring that a company can compete in today’s tight labor market.