- When issuing stock options to employees of a new company or investors in a business, using a vesting schedule is important. A vesting schedule provides guidance as to when and how the stock options will be issued. For example, 25 percent of the stock options given to an employee or investor will be vested after four years of service, and then the rest of the options are vested at some point after that. This helps keep employees loyal to the company, as they do not have full access to the stock options until having completed several years of service.
- Either non-qualified or incentive stock options can be issued. Incentive stock options are options that are typically provided to upper level management in a company. The attractive feature of incentive stock options is that they can be taxed at capital gains tax rates instead of at regular marginal tax rates. Non-qualified stock options are options that do not have any special tax treatment, but they can be sold at a discount to the market price of the stock, which allows for greater gains.
- In some cases, companies may be inclined to backdate stock options. This is a practice that involves choosing an earlier date for the issuance of the stock options in an attempt to make them more valuable. This is not necessarily illegal as long as the information is disclosed to the person who receives the stock options. If the company does not disclose this information, it is against the rules of the U.S. Securities Exchange Commission.
- When issuing stock options for employees or investors, it's wise to consider the impact that it can have on your company. It's a good idea to limit the amount of stock options that you issue to individuals, as offering too many can dilute the ownership of the company. You should also make sure that you retain enough ownership in the company that you still have some level of control, while still offering enough to each person that it gives them a legitimate incentive to perform.
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