Employee stock option plan with undefined vesting?
"An option without the vesting period and the price at which one can exercise the option is of not much value. If vesting is determined by board, then at any given point in time they can change the vesting period to say 3, 5, 10 years any number. The other aspect is at what price you are allowed to exercise the option, ie if the stock is of value 10, you may be given an option to buy this at 10, 20 or 100. This has to be stated upfront for you to know the real value. On listing if the value is say 80, then if you have the option to exercise at 10, or 20 you would make money, else at 100 you loose money and hence choose not to exercise the option. However your having stuck around the company for ""x"" years in anticipation of making money would go waste. Without a vesting period or the price to exercise the option, they are pretty much meaningless and would depend on the goodwill of the founders"
"Not necessarily.  The abbreviation ""ESOP"" is ambiguous.  There are at least 8 variations I know of: You'll find references on Google to each of those, some more than others.  For fun you can even substitute the word ""Executive"" for ""Employee"" and I'm sure you'll find more.  Really. So you may be mistaken about the ""O"" referring to ""options"" and thereby implying it must be about options.  Or, you may be right.  If you participate in such a plan (or program) then check the documentation and then you'll know what it stands for, and how it works.  That being said: companies can have either kind of incentive plan: one that issues stock, or one that issues options, with the intent to eventually issue stock in exchange for the option exercise price. When options are issued, they usually do have an expiration date by which you need to exercise if you want to buy the shares. There may be other conditions attached. For instance, whether the plan is about stocks or options, often there is a vesting schedule that determines when you become eligible to buy or exercise. When you buy the shares, they may be registered directly in your name (you might get a fancy certificate), or they may be deposited in an account in your name. If the company is small and private, the former may be the case, and if public, the latter may be the case. Details vary. Check the plan's documentation and/or with its administrators." There's no one answer. You need to weigh the fees and quality of investment options on the one side against the slowly vesting employer contribution and tax benefits of 401k contributions in excess of IRA limits. This situation sounds better than most, the company it seems likely to be profitable in the future.  As such it is a good candidate to have a successful IPO.   With that your stock options are likely to be worth something.  How much of that is your share is likely to be very small.  The workers that have been their since the beginning, the venture capitalist, and the founders will make the majority of profits from an IPO or sale.  Since you and others hired at a similar time as you are assuming almost no risk it is fair that your share of the take is small.   Despite being 1/130 employees expect your share of the profits to be much smaller than .77%.  How about we go with .01%?   Lets also assume that they go public in 2.5 years and that revenues during that time continue to increase by about 25M/year.  Profit margins remains the same.  So revenues to 112M, profits to 22.5M. Typically the goal for business is to pay no more than 5 times profits, that could be supplanted by other factors, but let's assume that figure.  So about 112M from the IPO.  So .01% of that is about 11K.  That feels about right. Keep in mind there would be underwriting fees, and also I would discount that figure for things that could go wrong.  I'd be at about 5K. That would be my expected value figure, 5K.  I'd also understand that there is a very small likelihood that I receive that amount.  The value received is more likely to be zero, or enough to buy a Ferarri. There might also be some value in getting to know these people.  If this fails will their next venture be a success. In my own life, I went to work for a company that looked great on paper that just turned out to be a bust.  Great concept, horrible management, and within a couple of years of being hired, the company went bust.  I worked like a dog for nothing. Unfortunately, the money that is not vested is not yours.  It belongs to your employer.  They have promised to give it to you after you have been with the company for a certain length of time, but if you aren't still with the company after that time, no matter what the reason, the money never becomes yours. Sorry to hear about this.  It would have been nice if your company had waived the vesting requirement like this guy's employer did, but I don't think they are required to do so, unfortunately. If it's a lot of money, you could ask an attorney, but as @JoeTaxpayer said, AT&T and IBM probably know what they are doing. I've had stock options at two different jobs.   If you are not getting a significant ownership stake, but rather just a portion of options as incentive to come work there, I would value them at $0.    If you get the same salary and benefits, but no stock options at another company and you like the other company better, I'd go to the other company. I say this because there are so many legal changes that seem to take value from you that you might as well not consider the options in your debate. That being said, the most important question I'd want to know is what incentive does the company have to going public or getting bought?    If the company is majority owned by investors, the stock options are likely to be worth something if you wait long enough.   You are essentially following someone else's bet.    If the company is owned by 2 or 3 individuals who want to make lots of money, they may or may not decide to sell or go public. "I don't think its a taxable event since no income has been constructively received (talking about the RSU shareholders here). I believe you're right with the IRC 1033, and the basis of the RSU is the basis of the original stock option (probably zero). Edit: see below. However, once the stock becomes vested - then it is a taxable event (not when the cash is received, but when the chance of forfeiture diminishes, even if the employee doesn't sell the stock), and is an ordinary income, not capital. That is my understanding of the situation, do not consider it as a tax advice in any way. I gave it a bit more though and I don't think IRC 1033 is relevant. You're not doing any exchange or conversion here, because you didn't have anything to convert to begin with, and don't have anything after the ""conversion"". Your ISO's are forfeited and no longer available, basically - you treat them as you've never had them. What happened is that you've received RSU's, and you treat them as a regular RSU grant, based on its vesting schedule. The tax consequences are exactly as I described in my original response: you recognize ordinary income on the vested stocks, as they vest. Your basis is zero (i.e.: the whole FMV of the stock at the time of vesting is your ordinary income). It should also be reflected in your W2 accordingly." "I'm in the US, so there may be idiosyncrasies with UK taxes that I'm not familiar with, but here's how I've always treated stock I get as compensation.   Suppose the vested shares are worth X.  If I had X in cash, would I buy my company's stock as an investment?  Usually the answer is no, not because I think the stock will tank, but because there's better things I can do with that cash (pay off debt, unfortunately).  Therefore I sell the shares and use the cash for something else. You have stock options. So suppose the stock value is X but you can buy it for Y.  You can either: Therefore, the math is the same. If you had X in cash, would you buy your company's stock as an investment?  If so, then option 2 is best, because you can get X in stock for a lower cost. (Option 3 might be better if the gain on the stock will be taxed higher, but they're pretty much equivalent if there's no chance that the stock will drop below Y) If not, then option 4 is best since you will likely get more than X-Y from selling the options that by exercising them and selling the stock (since options have time value). If option 4 is not a possibility, then option 1 is best - you pocket X-Y as ""income"" and invest it however you see fit." The answer to your question as asked is no.  Call options, even those issued by the company, cannot create new shares unless they are employee stock options. Company-issued warrants, on the other hand, can create new shares. Vesting typically stops after you quit.   So, if your plan vests 20% per year for 5 years, and you received a one-time stock grant as part of this plan (i.e., ignoring the fact that these often involve new grants each year that vest separately), and you were hired in 2014 and leave at the end of 2016, then you vested 20% in 2015 and 20% in 2016, so would have 40% of the stock vested when you quit, and would never have more than that. Is this an employee stock purchase plan (ESPP)? If so, and there is no required holding period, selling right away is essentially a guaranteed bonus with minimal risk. One caveat is that sometimes it takes a while to actually receive the shares at your brokerage, and in the meantime your company may have an earnings report that could cause the share price to drop. If your discount is only 5%, for example, a bad earnings report could easily wipe that out. The only other cons I can think of is ESPP contributions being withheld from you for months (albeit for a virtually guaranteed return), and it complicates your taxes a bit. On the flip side, another pro is that after you sell the shares, you are more likely to invest that money rather than spend it. "Yes, this is restricted by law.  In plain language, you can find it on the IRS website (under the heading ""When Can a Retirement Plan Distribute Benefits?""): 401(k), profit-sharing, and stock bonus plans Employee elective deferrals (and earnings, except in a hardship distribution) -- the plan may permit a distribution when you: •terminate employment (by death, disability, retirement or other severance from employment); •reach age 59½; or •suffer a hardship. Employer profit-sharing or matching contributions -- the plan may permit a distribution of your vested accrued benefit when you: •terminate employment (by death, disability, retirement or other severance from employment); •reach the age specified in the plan (any age); or •suffer a hardship or experience another event specified in the plan. Form of benefit - the plan may pay benefits in a single lump-sum payment as well as offer other options, including payments over a set period of time (such as 5 or 10 years) or a purchased annuity with monthly lifetime payments.  Source: https://www.irs.gov/retirement-plans/plan-participant-employee/when-can-a-retirement-plan-distribute-benefits If you want to actually see it in the law, check out 26 USC 401(k)(2)(B)(i), which lists the circumstances under which a distribution can be made.  You can get the full text, for example, here: https://www.law.cornell.edu/uscode/text/26/401 I'm not sure what to say about the practice of the company that you mentioned in your question.  Maybe the law was different then?" I've been through two instances where I worked for a public company that was merged (for stock) into another company.  In both cases the options I had were replaced with equivalent options in the merged company with the number of shares and strike price adjusted at the same rate as the actual stock was converted, and the vesting terms remained essentially the same.  In other words, the options before and after were in essence equivalent. There are some nuances with HCE definition. To answer your questions. It's compensation as defined by the plan. Usually it's gross comp, but it can exclude things like fringe benefits, overtime pay, commissions, bonuses, etc. The compensation test is also a look-back test, meaning that an EE is determined to be an HCE in the current year if their compensation in the previous year was over the limit. I'm not sure how stock options affect this, but I expect they would be counted. Probably have an ESOP plan at that point too which is a whole other can-o-woms. The 5% owner test applies to the current year and also has a one-year look-back period. If at ANY point, even for a day, an employee was more than 5% owner, they are HCE for that year and next. Yes there is a limit. A company may limit the amount of HCE's to the top 20% of employees by pay like Aganju said. They can also disregard employees that may otherwise have been excluded under the plan using statutory exclusions. Example, they can disregard employees under 21 years and with less than 1 year of service. Hahaha, the IRS does not like to concisely define things. You can look here, that's probably as concise as you'll get. Hope this helps! Options or Shares vest by date they are granted. It would strike me as odd for anyone to say their shares were given with 4 year vesting, but the clock was pre-started years prior.  In my opinion, you have nothing to complain about. My employer matches 1 to 1 up to 6% of pay. They also toss in 3, 4 or 5 percent of your annual salary depending on your age and years of service. The self-directed brokerage account option costs $20 per quarter. That account only allows buying and selling of stock, no short sales and no options. The commissions are $12.99 per trade, plus $0.01 per share over 1000 shares. I feel that's a little high for what I'm getting. I'm considering 401k loans to invest more profitably outside of the 401k, specifically using options. Contrary to what others have said, I feel that limited options trading (the sale cash secured puts and spreads) can be much safer than buying and selling of stock. I have inquired about options trading in this account, since the trustee's system shows options right on the menus, but they are all disabled. I was told that the employer decided against enabling options trading due to the perceived risks.