On: We need to rethink employee compensation

[tedunangst]

The strike price for options you receive two years from now will likely be much higher than the strike today.

[areyousure → tedunangst]

Why can't I be told what the strike price will be for the options for the next four years?

[tptacek → areyousure]

Because it depends on the valuation of the company, and nobody can see the future.

[areyousure → tptacek]

Can't the strike price be set in the employment contract right now?

[tptacek → areyousure]

Possibly among other issues, because if you grant options to an employee that are below the fair market value of the company, you've just created immediately taxable income for the employee.

[areyousure → tptacek]

I think this hits the target.

As far as I understand, granting an option now with a currently "fair" strike price which "vests" in the future (but only if the person is still employed), does not create a taxable event at the time of vesting. However, granting an option in the future at the exact same strike price at the exact same time, creates a taxable event.

So my understanding is that option vesting is "simply" tax-preferred.

[jalonso510 → areyousure]

No. Options have to be priced at the time the grant is made, and that price needs to be the then-current fair market value of the company.