Non-Qualified Stock Options

Companies tend to prefer non-qualified stock options simply because they offer a much more efficient and flexible way to retain and attract employees as well as service providers. Employees tend to favor these options since they offer an opportunity to grow their wealth and defer taxes until the specific year of exercise. Non-qualified stock options are becoming a very popular way to compensate equity. They are typically offered with a stock option plan that has been approved by shareholders in the company in question. The company’s board of directors or a specific committee that the board appoints will decide who should receive the awards as well as the terms of the options for that company. Options can be granted using a specific formula in some cases as well.

When options are provided by a company there are typically documents that are received by the employees who are participating. Option agreements will outline the specific terms of the options and if that option is issued under a plan there may also be a copy of the plan included in the documents. This plan copy will provide information regarding the rule that govern the non-qualifying stock options. A summary of the plan may also be included.

If you are planning to enroll in non-qualifying stock options within your company it is important that you understand all of the terms of the option as well as your rights under the plan and the agreement. Things that you should know include when you can actually exercise your option. Find out the earliest day that the option becomes exercisable and whether or not you can exercise the plan in stages. You should also understand what you need to do when you are ready to exercise the option. Many options are cashless or can be exercised using stock owned by the individual. Find out when the option terminates and whether or not you have the opportunity to exercise it if you are terminated from your company. You should also check to see what happens if you die while you are still holding the option. Find out if your beneficiary has the right to exercise the option in the event of your death while still holding it.

It is important that you keep your non-qualifying stock options documents in a safe and easy to reach place. You can take some time to look over them regularly to ensure that you plan according to the terms outlined in the agreement. You should consider any options that you hold at least at year’s end to ensure whether or not you should exercise them or at least a portion of them in order to plan for your yearly tax filings.

There are a number of terms that are used along with non-qualifying stock options and understanding these terms is important for your overall investment potential. In some cases, you may receive the option if and when your company makes an award or a grant. You may be able to exercise the option if and when you take the actions that are laid out in the option agreement to purchase the stock. You may have to fill out various forms that will notify your company that you are indeed exercising your options. You may also need to provide the cash equivalent of the purchase price of that stock as well as any cash needed to cover the withholding obligation of the stock.

You should understand that if the exercise price of the option is higher than the stock value then the option is out of money. This is also known as under water. There is no known about tax significance to options that are out of money but you should understand that if and when this happens you will not be in the position of profiting if you choose to exercise your option. You may want to wait to exercise the option until the price of the stock has recovered.

There are a number of advantages to non-qualifying stock options. Understanding the advantages as well as the drawbacks will help you to better prepare your investment portfolio for holding these types of options. Spend some time doing a bit of research into the benefits and disadvantages of holding non-qualifying stock options before you choose to invest in this opportunity.

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