What to do with your share options

Share options used to once be a thing of dreams where employees would wait with bated breath until the day they were offered the right to buy shares in the company they worked to for. Now, shares are a risky business with less hands then ever before outstretched to grab them due to the uncertainty they’re riddled with.

They tend to be issued as a form of performance-related pay as, in theory, the harder the employees work and the better the company does, the higher the share price will go. Shares can be given as a gift – possibly even a Christmas bonus – or purchased from the company, but there are also share options which can be defined as your ‘right to buy’ as a result of working there.

When in this position, it is not compulsory to make a purchase but for those who do find them highly attractive, it pays to remember that there are a number of things to consider before you commit to buy into any share schemes.

Think it through

When you are offered shares, the first thing to be on the look out for is if they are liquid or not, and therefore whether you have the option to sell them on. For this to happen the company has to be publicly traded on the stock exchange, or there could even be an internal market to sell within the company.

Take note of whether they are part of a government scheme where they may then benefit from little or no tax, or if they are unapproved where unfortunately there will be no tax advantages and you may suffer from a combination of Inheritance Tax (IHT) and Capital Gains Tax (CGT).

You should also scout out similar public companies in your sector, especially if your company is still private, and compare the price to earnings/price to sales ratios to those of your own company, to see if it would indeed be a viable route for investment.

Getting a feel for the other companies in your particular sector means that you can gauge whether you’d be in line for making any profit. It’s much easier to estimate the future value of an established company with a good track record in a thriving industry than one which is off the radar. If your calculations start to look a bit bleak then it might be time for a strategy rethink.

Public or private?

Ultimately, share options are tied up with your annual salary as they are both part of the total work package. The only difference is that a portion lies on relatively unstable ground depending on the individual share value. It is this type of risk which you need to make sure that you are 100 per cent happy with – and if is it outweighed by the possible rewards.
As a general rule, a public company is more of a stable investment, as both employees and management become aligned in a more rigid structure and it sees less dramatic price fluctuations. A private company will offer far more lucrative returns, but where there are greater spoils to be had, keep in mind that there are also greater risks to endure.