How Many Types of Employee Stock Options Are There?

Employee Stock

Only 24% of workers have taken advantage of employee stock options. If you are fortunate enough to have access to stock options at your place of work, you need to consider utilizing them.

Before you do, you need to learn about the types of employee stock options out there. Stock options for employees vary. Different employers offer different types of employee stock options. Some may offer you multiple options. 

So how can you pick the best employee stock option plan for you? Start by perusing this handy guide. Here, we discuss different types of employee stock options and which ones will work best for you. Read on to find out more.

How Do Employee Stock Options Work?

Employee stock options are an incentive program offered by some companies to employees. Most often, startups or new companies offer stock options as an incentive to attract new talent and help the company grow.

In short, they allow employees to buy stocks at a special price for a specific period. The employee cannot sell their stock right away. They must wait until it has vested. After this period, they can sell their stock for market price.

Incentive Stock Options

The first type of employee stock option is ISOs or incentive stock options. These types of stock options are treated as long-term capital gains, meaning that employees don’t need to pay taxes on them right away.

Due to this preferential tax treatment, ISOs are often only offered to key employees or founding members of the company. Sometimes upper management gets ISO options as well.

Non-Qualified Stock Options

The second type of stock option for employees is known as NSOs or non-qualified stock options. These stock options receive no preferential tax treatment. Profits from these stock options are considered regular income.

For this reason, NSOs are the most common of the company stock options offered to employees. Many employees may see NSO stock options in salary form. From contractors to low-level employees, NSOs are offered to all levels.

Other Types of Employee Stock Options

In addition to ISOs and NSOs, there are other employee equity options to be aware of. Let’s take a look at a few other options.

Stock Appreciation Rights

Stock appreciation rights give employees equity for the amount their company’s stock has increased over a set time. They may receive their payment in cash or additional stock.

Employee Stock Purchasing Plans

This type of stock option lets employees purchases discounted stock over a long period. They may purchase additional stock at set intervals or when they choose based on the conditions of the plan.

Restricted Stock Grants

For this stock program, employees need to meet certain criteria to be eligible for selling their stock. Usually, this means working at the company for a set period before selling restricted stock.

Know Your Best Employee Stock Option

Employee stock options give workers a higher stake in the success of their company. The better off their company does due to their hard work, the more they will earn. Stock options are an excellent incentive option for both parties.

Use the information in this guide to find the best types of employee stock options for your portfolio. When talking to your employer, come prepared with the information you learned today. For other great tips, check out our blog!