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I am not a financial specialist but my company has offered me several stock options. Under this agreement, I will get 25,000 shares immediately, after 180 days I get an additional 50,000 vested, and after 45 months I get an additional 125,000 vested bringing the total to 200,000 shares.

Problem is, I don't know anything about stock. For starters, I don't know what vested means. The stock is valued at $3.00 per share roughly. I also don't know how yearly dividends work. I've tried doing some research, but corporate finance has never been my strong suit. It was the only course in my master's that I actually failed and luckily dropped before it was too late.

So can someone use kindergarten terms to explain what this deal means in this scenario in regards to both vested and dividends concepts?

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Vesting
As you may know a stock option is the right to acquire a given amount of stock at a given price. Actually acquiring the stock is referred to as exercising the option. Your company is offering you options over 200,000 shares but not all of those options can be exercised immediately.

Initially you will only be able to acquire 25,000 shares; the other 175,000 have conditions attached, the condition in this case presumably being that you are still employed by the company at the specified time in the future. When the conditions attached to a stock option are satisfied that option is said to have vested - this simply means that the holder of the option can now exercise that option at any time they choose and thereby acquire the relevant shares.

Dividends
Arguably the primary purpose of most private companies is to make money for their owners (i.e. the shareholders) by selling goods and/or services at a profit. How does that money actually get to the shareholders? There are a few possible ways of which paying a dividend is one. Periodically (potentially annually but possibly more or less frequently or irregularly) the management of a company may look at how it is doing and decide that it can afford to pay so many cents per share as a dividend. Every shareholder would then receive that number of cents multiplied by the number of shares held.

So for example in 4 years or so, after all your stock options have vested and assuming you have exercised them you will own 200,000 shares in your company. If the board declares a dividend of 10 cents per share you would receive $20,000. Depending on where you are and your exact circumstances you may or may not have to pay tax on this.

Those are the basic concepts - as you might expect there are all kinds of variations and complications that can occur, but that's hopefully enough to get you started.

  • Very helpful. So when a company gives you stock options, they are not actually giving you the shares. They're giving you the right to purchase those shares. This is how I'm understanding what you're saying. So, for example, if I want the 25,000 shares immediately I will need to give them $75,000 for those shares at the current value. Correct? – o_O Apr 10 '15 at 0:10
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    @o_O: The option gives you the right to purchase the shares at a particular price which is fixed and built in to the option (called the strike price). In other words, if you get options for 25,000 shares with a strike price of $3, you have the right to buy 25,000 shares for $3 each whenever you choose. The idea is that, even if the stock goes up later, you still get to buy it at the old price by using your option. You may want to read up on options, for instance at Investopedia. – BrenBarn Apr 10 '15 at 3:08
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    @o_O: pretty much. The strike price may not be the current open-market price; sometimes options given by employers as an incentive include a discount to make them attractive (an option isn't much of an incentive if it just allows you to do what you could do in the market anyway!). Also it will often be possible to buy and then immediately sell your shares without putting up any cash, and just take the profit. – Nigel Harper Apr 10 '15 at 6:03
  • @NigelHarper Thanks both of you. This was very informative and helpful. – o_O Apr 10 '15 at 15:49
  • @BrenBarn thanks a lot for the link. I will definitely use it. – o_O Apr 10 '15 at 15:49

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