Stock Options

For a worker, a stock option investment may be a way to invest for retirement or to build wealth. Many firms offer stock option investing for their employees. This means that the employer gives the employees the right to buy a specific number of shares in the company during a time and price that he specifies. Both privately and publicly held companies can offer this advantage. Usually, the investments are offered to attract and keep good workers, to make employees feel like they have a part in the business, and to give skilled workers compensation beyond a salary. This is often true of start-up companies that cannot compete with more established firms in hiring skilled workers.

The price the company sets on the stock is called the grant or strike price, and it is less than the price offered to the public at large. The stipulation is that the stock cannot be sold for a certain period of time, called the vesting period. This vesting period may be for three to ten years. The employee takes up the offer because the worker thinks that in that time period, the price of the shares will go up. Then when the buyer goes to sell them, he will make a profit. The disadvantage is if the company goes out of business or doesn't do well, the employee will lose money when his shares are sold. In taking stock option investment, the employee has several options. He can wait until the vesting period is over and sell his shares, or go through the vesting period, sell some of his shares, and keep some to sell later. A third option after the vesting period is to change all the options to stocks, but at the discounted price, and keep them all with the idea of selling later when each share is worth substantially more.

Financial options are contracts between two parties with the terms specified in a term sheet. The holders right to buy is called a call option, and the right to sell is called the put option. The employer will usually limit the number of shares that workers can buy at the discounted price. Of course, the worker could buy any number of shares at the regular price through the normal investing avenues. Usually, stock option investing plans have expiration dates, meaning that the worker can exercise options starting on a certain date and ending on a certain date, often within one year. If the worker doesn't exercise the options, he loses them. If the worker quits the job, he can keep vested options, but cannot buy more. Small, closely held companies sometimes do not want to go public, so they may find it difficult to create a market for shares in the firm. If the company doesn't have a broad-base with which to sell market shares, this plan may not work well for the employee.

One important question to ask when agreeing to this benefit is how the company fixes the price on its stocks. Most firms settle on a price through the company's board of directors through a vote. Therefore, before deciding on stock option investing, the market value of the company's stocks should be researched to find out if the deal offered will be profitable or if the discounted price of the shares is too high. For some firms that are new to the market, this price may be hard to determine. This investment accompanies some risk since the investor is not guaranteed that his shares will go up in value during the vestment period. If the company sees a set back or goes bankrupt, the employee will suffer the loss. A good example of this is what happened to Enron employees who bought huge amounts of their company's stock, and many lost their entire retirement when Enron folded. In the past, companies used stock option investment to reward top management and key employees so that these people would feel onwership in the company. But now more firms are extending these benefits to all employees. In many high-technology companies, this is the norm, and many people looking for jobs regularly ask about these benefits.

Companies have to determine how many shares they are willing to put up for stock option investment, who will receive the benefits, and how many employees the company will have in the future so that it can offer an adequate amount of shares at that time. A mistake a firm may make is offering so many options right away that it doesn't reserve any for future employees. The usual purpose of the offering is to help the workers feel an ownership in the business, so the planners need to carefully determine the eligibility, allocation, vesting, valuation, holding periods, and price. All these will determine who will invest and for how much.

Many companies tie stock option investing to retirement plans, but a wise worker will understand the risk involved in depending on these moneys for future income. A good retirement plan will include other avenues than this to assure an adequate income during retirement. In some cases, financial compensation may be better than investing in a company's shares, especially if a worker doesn't plan on staying with the firm for a long time or the firm has a bleak financial outlook. Each worker must determine for himself whether or not the deal he is offered is worth taking. But our futures are secure in God's hands. Psalm 146:5 assures us, "Happy is he that hath the God of Jacob for his help, whose hope is in the Lord his God." Our happiness does not depend on our investment skill, but in our trust in God.