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Stock Options 101

If you're earning six figures, you've probably noticed something: the best-paying jobs increasingly come with equity compensation.

Whether you're evaluating a job offer from a tech company promising stock options, already sitting on grants you don't fully understand, or considering a career move to a startup offering "significant upside," you need to know what you're actually getting.

The problem? So many high earners are brilliant at their jobs but never learned the language of equity compensation. So let’s dive into this topic to help ensure you’re not leaving money on the table, making costly tax mistakes, or potentially missing out on opportunities simply because stock options feel too complicated to navigate.

What Are Stock Options, Really?

Think of stock options like a special coupon that lets you buy your company's stock at a locked-in price (called the "strike price") for a certain period of time. If the company does well and the stock price goes up, you can "exercise" your options (e.g. buy the shares at your discounted price and potentially sell them at the higher market price).

Quick Example: You get options with a $10 strike price. Two years later, the company goes public and trades at $50. You can buy shares for $10 and immediately sell for $50. That's $40 profit per share!

The Two Main Types You'll Encounter

1: Incentive Stock Options (ISOs)

• The Good: Potential tax advantages if you hold shares long enough

• The Catch: Limited to $100k worth per year, complex tax rules

• Typically Best For: Early employees at startups with high growth potential

2: Non-Qualified Stock Options (NQSOs)

• The Good: More flexible, no dollar limits

• The Catch: Taxed as regular income when exercised

• Typically Best For: Most corporate employees and later-stage startup hires

Helpful Tip: Check your grant documents to see which type you have (it can significantly affect your tax strategy).

The Vesting Schedule: Your Patience Test

Most options don't become available all at once. Common schedules:

• 4-year vest with 1-year cliff: Nothing for 12 months, then 25% vests, followed by monthly vesting for the remaining 3 years
  

• Straight 4-year: 25% each year for four years
  

• Accelerated vesting: Sometimes triggered by company sale or IPO

Reality Check: If you leave before your cliff, you lose everything so you’ll definitely want to plan accordingly.

"What About Taxes?"

Alright, this gets a bit complex fast but here are the basics:

ISOs:

• No tax when you exercise (but watch out for “Alternative Minimum Tax”)

• Capital gains treatment if you hold 2+ years from grant and 1+ year from exercise

NQSOs:

• Taxed as income on the spread when you exercise

• Then capital gains on any further appreciation

The Golden Rule: Always consult a tax professional before making major moves :)

Red Flags to Avoid

• Exercising options you can't afford to lose (remember, private company stock is illiquid)

• Ignoring expiration dates (typically 10 years from grant, but only 90 days after leaving the company)

• Not understanding your company's repurchase rights (some can buy back your shares at cost)

• Forgetting about the Alternative Minimum Tax with ISOs

• Exercising everything at once without considering tax implications

The Bottom Line

At the end of the day, stock options can be incredible wealth builders but they're not free money. To do things “right” it will require patience, planning, and a solid understanding of both the upside potential and the risks involved. Really the ideal approach is treating them as one part of your overall financial strategy but never your entire retirement plan.

That said, I’ll be crossing my fingers for you! :)

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If you want more resources on building wealth as a solopreneur/entrepreneur, check these out:

• The Solo 401k handbook

• The Roth IRA handbook

• The Self-Directed IRA handbook

• The Guide to Paying Less in Taxes

• What is a Solo 401k?

• How to Open a Solo 401k