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Ask HN: What are stock options? What should I do with them?

8 points by sydesigner ↗ HN
I'm a recent graduate, and I've just received a job offer for a small, but well established startup. Stock options are part of the renumeration package. What should I understand about them, and how should I go about effectively making best use of them? Also, can anyone recommend any advice on decent books to read to get acquainted with personal finance and budgetting, I've been in school so long, I need to understand how the real world works.

Many thanks, Sydesigner

5 comments

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voldron
Stock options state that you may exercise, essentially invoke, your right to buy a stock at a given price, also known as a strike price. If you have 100 options at a strike price of $20, you have the right to buy 100 shares at $20 per share regardless of current market value of the stock. Your options also may be subject to a vesting period. This means that after a given time you are given a certain amount or percentage of options you may use. For instance if your 100 options vest over 4 years, you would have 25 options per year that you are allowed to exercise. Vesting periods can be different so ask your employer.

Here is an example:

You are given a strike price of $20 per share and decided to exercise your option. The stock is currently at $30 per share. You are now buying the stock at $20 per share. You now decide to immediately sell those shares and now make $10 per share gross profit.

All stock purchases and sale must be done through a broker.

Hope this helps.

Moral_
>If you have 100 options at a strike price of $20, you have the right to buy 100 shares at $20 per share regardless of current market value of the stock

Not exactly. Maybe this isn't the same thing as an employer stock option. But a single call option, what I think you're referring to, gives you the right to buy 100 shares at x strike price. So 100 call options would be 10,000 shares at x price.

voldron
That is true for call and put options but employee stock options are not the same thing. A call or put option as you stated is for 100 shares per option contract. An employee stock option is the right to buy N number of shares at a strike price, not in blocks of 100 per contract.
Moral_
Thanks for the clarification!
skotzko
Good question that most people face and are afraid to ask :)

Here are some resources to check out that have covered this well:

* Rand wrote a great post (http://moz.com/rand/understanding-stock-options-at-startups-...)

* Solid overview: http://www.danshapiro.com/blog/2010/11/how-much-are-startup-...

* This is a good book that doesn't get enough love (http://www.amazon.com/Engineers-Silicon-Valley-Startups-eboo...)

* Good high-level notes about equity in startups (part of an incredible series, read it all if you can - http://blakemasters.com/post/21742864570/peter-thiels-cs183-...)

* Venture Hacks on the "Option Pool Shuffle": http://venturehacks.com/articles/option-pool-shuffle