What are stock options and how do they work: a basic guide

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When it comes to retaining talent in your business, you have different resources that can help you. And one of them is offering stock options . In this basic guide, we tell you what they are, how they work , and we offer you two examples to clarify this perfect resource for your most loyal employees.

What are stock options?
Stock options , also known as stock options , are a financial instrument that gives employees the opportunity to purchase shares in the company they work for at a pre-established price during a specific period.

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This resource is widely used in startups and technology argentina phone number lead companies, although it can be applied to all types of businesses . As you can imagine, it is a perfect economic resource to retain talent or motivate your most loyal employees.

On the one hand, you encourage employees to contribute to the growth of your business or company; on the other hand, you make them feel part of the project . This helps retain talent and keeps your employees more motivated than ever.

What if my business doesn't have stock?
If there are no shares in your business, you can offer stock options as an investment and be able to have a stake with annual profit sharing .

Let's say you have a website and you want a writer to be fully involved in your project, since he or she is the one who is giving the best results. This employee can make an investment and become part of the annual dividend distribution; this would allow you to negotiate the return of the investment made within a certain period and under conditions that are advantageous for both parties.

How do stock options work?
When an employee buys stock options, he or she is buying shares at a price below the market price. This difference will translate into benefits for the employee, especially if the shares rise. And it will help him or her to become more involved in the project.

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For this purpose, a stock options plan is drawn up , which can be defined as the framework through which a company grants stock options to its employees. This plan establishes the terms and conditions under which the options are granted and exercised.

Stock options are usually presented in a predetermined format and must include the following concepts:

Grant Date : The date on which the stock options are awarded to the employee.
Exercise price : Also known as strike price , this is the price at which the employee can buy the shares.
Number of shares : the number of shares or units that can be purchased.
Terms of purchase : The timetable and conditions under which the options become exercisable will be detailed. This will include other details. If shares are purchased, dates of a possible sale will be specified, while in the case of shares, this will vary depending on the conditions previously agreed.
Vesting Period : The period of time the employee has before exercising his or her stock options and how this will be done.
Expiration date : deadline on which the employee will exercise the purchase of stock options.
Stock option examples
Finally, we leave you two examples so that you understand the concept.

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A company wants to offer shares to an employee it wants to retain . So it offers him 1000 stock options at a price of €10 per share. The employee will be able to acquire 250 shares per year, so in four years he will have bought all the stock options.

The market value is €50 per share, so the employee will have a potential profit of €40,000 (€10,000 investment for shares worth €50,000); potential because the conditions state that the shares cannot be sold until after four years, and the market is volatile.

Another example of stock options without shares: a profitable sales website wants to reward an employee to retain talent. It offers him stock options in the form of shares for the agreed dividend distribution, if he is interested in making an investment of €2000.

The terms and conditions state that it is a quarterly distribution of 10% of the profits obtained from the sale of products, and he will have a 10% share. The quarterly average is around €50,000, so €5,000 is distributed, of which the employee will keep €500. In addition, it is specified that the €2,000 invested cannot be claimed until two years have passed since the signing of the participation.