What risks and dangers associated with stock options do I need to be aware of?
What are the key dangers for an employee when it comes to equity compensation?
What are some disadvantages of equity compensation, including stock options?
Summary of Dangers
Because of their importance, we’ll wind up with a recap of some of the key dangers we’ve discussed when thinking about equity compensation:
danger When it comes to equity compensation, details matter! You need to understand the type of stock grant or stock option in detail, as well as what it means for your taxes, to know what your equity is worth.
danger Because details are so important, professional advice from a tax advisor or lawyer familiar with equity compensation (or both) is often a good idea. Avoid doing everything yourself, but also avoid blindly trusting advisors without having them explain the details to you in a way you understand.
danger With stock options, high exercise costs or high taxes, including the AMT trap, may prevent you from exercising your options. If you can’t sell the stock and your exercise window is limited, you could effectively be forced to walk away from your stock options.
danger If a job offer includes equity, you need a lot of information to understand the value of the equity component. If the company trusts you enough to be making an offer but doesn’t want to answer questions about that offer, consider it a warning sign. Next, we offer more details on what to ask about your offer, and how to negotiate to get the answers you want.