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Many successful companies know the importance of rewarding and retaining key employees. Some forms of this include non-cash compensation, bonuses, stock, or stock options.
Here, we’ll delve into stock and stock options, specifically company stock grants and incentive stock options. Both give you the opportunity to profit directly from your contribution to the success of your company.
With stock grants, your employer grants you a specific number of shares at a predetermined price (both requirements set by the company). These grants may be offered to a wider base of employees to create an atmosphere of shared rewards.
Depending on the value of your grants at the time you exercise the stock, stock grants could add a substantial amount to your taxable income.
ISOs (Incentive Stock Options) are mainly awarded to top executives or other key employees the employer wants to attract, incentivize, and/or retain. For these employees, it can represent a large portion of their overall compensation.
ISOs granted by your employer give you the right to purchase shares of the company’s stock at a set time and predetermined purchase price. Depending on the structure of the plan, if you exercise the options and satisfy certain requirements, then you can receive favorable capital gains tax treatment.
Understanding the requirements, limitations, and tax consequences to the various types of stock options can be confusing. Working with a financial professional can help you decide how these options fit your overall plan.