What should I do with my stock options?

A stock market trading graph

In the tech sector, many small and growing companies offer shares as part of their benefits package. This can potentially be very lucrative, as they may significantly rise in value as the business grows and increases its profitability.

If you’re lucky enough to work for a company that offers you shares and stock options, you might be wondering what to do with them.

Thankfully, it often isn’t as complicated as it may seem, so read on to find out what you should do with your shares and stock options.

Shares and stock options are some of the most common benefits you may receive

Typically, there are three common types of benefits that your company may offer as part of your compensation package. These are common shares, growth shares and stock options. Each have their own advantages, so it’s important to be able to understand how they work.

Ordinary shares

Sometimes called “common shares”, these assets essentially give you a part ownership of the company. Unlike growth shares, anyone can own these, including private investors.

Owning shares can sometimes entitle you to dividend payments or being able to vote on major company decisions.

Growth shares

Growth shares are similar to ordinary shares but work slightly differently. For a start, unlike common shares, they typically don’t entitle you to any dividends or the right to vote on company decisions. Furthermore, they are usually only issued to employees.

Often, your company will issue growth shares at a slightly inflated value known as the “hurdle price”, which reflects the hope that the business will grow. This means you can only sell your shares when the value has increased past this point.

For example, let’s say you joined your company when its shares were worth 100p each. As part of your compensation package, they issue you growth shares with a price hurdle of 120p. This means you can’t profit from selling these assets until the value of your company’s shares have increased by at least 20%.

Stock options

Another important benefit that you may receive as part of your compensation package are stock options. Essentially, this gives you the right to buy a set number of shares in the company at a future date for a pre-set price.

This can be a very valuable benefit if your company grows faster than expected, as it may mean you can buy stocks at a significant discount. However, you may only have a limited time to take advantage of this offer and could lose the opportunity if you leave the company.

It’s also important to note that, even if you have options to buy at a future date, they are not real shares until you have bought them. This means that you won’t yet see the benefits of being a shareholder, such as getting dividend payments or voting rights.

There may be tax considerations to think about when you take shares and stock options

Shares and stock options can be a useful way to grow your portfolio and you can potentially make a large amount of profit from them. Of course, before you can, it’s important to understand the tax liabilities you could run into.

Typically, if your company offers you shares, you may be able to get valuable tax advantages, such as not having to pay Income Tax or National Insurance on their value. However, this is only the case if you receive them through one of the following schemes:

  • Share Incentive Plans (SIP)
  • Save As You Earn (SAYE)
  • Company Share Option Plans
  • Enterprise Management Incentives (EMIs)

It’s also important to bear in mind that, when you come to sell your shares, you may need to factor in the effect of taxes. However, while both Income Tax and Capital Gains Tax could eat into your profits, there may be ways to mitigate these taxes.

For example, if you received your shares through either a SAYE scheme or a SIP, you may be able to transfer up to £20,000 of them into an Individual Savings Account (ISA).

While you typically have to make such a transfer within 90 days of claiming your shares, this can have valuable benefits, as ISAs are a tax-efficient way to build your wealth. This means that you won’t have to pay any Capital Gains Tax on the growth of the value of your shares and any value you take later will be paid free of Income Tax. These shares will count towards your £20,000 ISA limit.

Of course, when it comes to navigating tax laws, there can be many potential pitfalls that you could run into. This is where seeking professional advice can help you.

Working with an expert can help you to manage your wealth more effectively

When you work with a financial planner, they can help you to make informed decisions about your wealth. This can help you to grow it more effectively and reduce your tax liabilities.

Furthermore, if your company shares grow significantly in value over time, then they may make up a large portion of your portfolio. If this is the case, a planner can help you to regularly rebalance it, so you aren’t overly exposed to the risk of a market downturn.

Working with a professional can help to give you more confidence that you’re managing your wealth as effectively as possible to meet your long-term goals.

Get in touch

If your company offers you shares and stock options and you want to know how to make the most of them, we can help. Email enquiries@bowmorefp.com or call us on 01275 462 469.

Please note:

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Share values and income generated by the investments could go down as well as up and you may get back less than you originally invested. These investments are highly illiquid, which means investors could find it difficult to, or be unable to, realise their shares at a value that’s close to the value of the underlying assets.

Tax levels and reliefs could change and the availability of tax reliefs will depend on individual circumstances.

Bowmore Financial Planning Ltd is not regulated to provide tax advice.

Bowmore Financial Planning Ltd is authorised and regulated by the FCA.