By Echo Huang, CFA, CFP®, CPA
Do you have any non-qualified stock options (NSOs) granted to you by your employer? NSOs are a common equity compensation feature provided to management level employees as part of a compensation package. They give you the opportunity to potentially profit from the price increase in your employer’s stock. An employee stock option gives you the right to purchase a specific number of shares of your company’s stock at a specific price – the grant or strike price – within a specific time period. The grant price is typically the market value of the stock at the time your company granted you the options. Here are some of the essential things you ought to know about your NSOs.
- Vesting Period. Vesting is the time at which you have met the required service period and may exercise the option to purchase the time. You are not required, however, to exercise your options as soon as they vest. Your vesting schedule is contained in your grant agreement. For example, if it is four years cliff vesting, the entire grant will vest after four years from the date you receive this grant.
- Expiration Date. After your NSOs are vested and the current market price is greater than the grant price, it has in-the-money value, then you can decide when to exercise the options to capture the profit. Note that if you don’t exercise your stock options before the expiration date, they will expire with no value. For example, the grant may have four years cliff vesting period and the expiration date is ten years from the date of grant. In this case, you have six years to monitor the stock price to determine the best time to exercise this option. I recommend watching the price closely in the last two to three years before the expiration date.