Tax Implications

• The IRS expects to get a piece of any form of compensation you earn for yourself. The IRS considers stock options to be a form of income, much like a salary. The taxes you owe on the stock options depend on the type of stock option, the exercise price and the current price of the underlying shares of common stock. It's best to consult with a financial planner and your company's human resources or financial officers to understand the taxes you may owe on your stock options for various scenarios. Often, employees find themselves with hefty tax liabilities they weren't prepared to carry.
  
  

Risk of Becoming Worthless

• If you pass on a cash raise or sign-on bonus in favor of stock options, consider that the stock options may never amount to anything. If the company goes under or is unable to create a marketplace for the shares of stock via a public offering or acquisition, your stock options may end up worthless. Certainly, it's good to be optimistic and hope for a situation that makes your options very valuable, but it's equally important to be realistic about the possibility of never being able to cash them in.
  
  

Available Cash on Hand

• When it comes time to exercise your stock options, you have to write a check to a company to be issued the appropriate number of shares of stock in the company. If you have a sizable block of options, you may have to write a fairly hefty check to be issued the shares of stock. Furthermore, you may only have a limited amount of time to come up with the cash or forfeit your options. Companies may have programs to aid with the financing of stock option exercise, but be prepared to have cash available to make sure you keep what you've earned.
  
  

Employment Flexibility

• Nearly all stock options awards come with vesting schedules. If you were given a block of stock options with a two-year vesting schedule and found a great new employment opportunity after a year and a half of service, be prepared to forfeit the options you would have been officially issued if you had stayed through the end of your second year. Additionally, it's not uncommon for employers to require employees to exercise shares upon leaving the company or forfeit the options. Before jumping ship to another job, you may need to evaluate the potential value of your stock options.