Stock Option — what is it? Employee stock options

Definition

Stock option is the right, but not obligation, to purchase company shares at a predetermined price (strike price) within a specified timeframe. Technology companies and startups often grant stock options to employees as part of their compensation package.

Quick Answer

A stock option is the right, but not the obligation, to purchase company shares at a predetermined strike price within a set timeframe, commonly granted to employees as compensation. They vest gradually (typically 4 years with a 1-year cliff), and become valuable when the strike price is below market value ("in the money"); below it they are "underwater" and worthless. In Poland they are taxed in two stages: PIT on the spread at exercise (up to 32%) and 19% capital gains on sale (PIT-38). This is educational information, not investment advice.

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How do stock options work?

1. Grant — company grants you e.g., 10,000 options at 5 PLN/share price
2. Vesting — options "unlock" gradually (typically 4 years with 1-year cliff)
3. Exercise — you buy shares at 5 PLN price, even if market value is 50 PLN
4. Sale — you sell shares at market price, earning the difference

Types of options

• ISO (Incentive Stock Options) — mainly used in USA, tax-advantaged
• NSO (Non-Qualified Stock Options) — more flexible, but less tax-advantaged
• ESOP (Employee Stock Ownership Plan) — employee profit-sharing plan
• RSU (Restricted Stock Units) — not options, but direct shares with vesting (increasingly popular)

Strike price vs market value

Key to profit: if strike price < market value, your options are "in the money" — they have real value.

Example:

• Strike price: 10 PLN
• Market value: 60 PLN
• Profit per option: 50 PLN
• With 5,000 options: 250,000 PLN profit

If market value falls below strike price, options are "underwater" — worthless (but you don't have to exercise them).

Taxation in Poland

Stock options are taxed in Poland in two stages:

1. Upon exercise — difference between market value and strike price subject to PIT (tax scale, up to 32%)
2. Upon share sale — capital gain taxed at 19% (PIT-38)

Note: Tax interpretations vary depending on program structure. It's worth consulting with a tax advisor.

When to exercise options?

• Options expire — typically 10 years from grant or 90 days after leaving the company
• Company goes public (IPO) — classic exercise moment
• Company is acquired — often automatic vesting acceleration
• You need liquidity — secondary markets (e.g., EquityBee, Forge) allow selling options before IPO

How can Freenance help

Freenance allows you to add stock options to your portfolio and track their estimated value. You see what percentage of your wealth consists of company equity, helping you make decisions about diversification and option exercise.

👉 Track your stock options value with Freenance — freenance.io

Related Articles

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FAQ

What is the difference between a call option and a put option?

A call option gives the holder the right (not the obligation) to buy the underlying asset at a fixed strike price within a set period. A put option gives the right to sell at the strike price. Employee stock options are typically calls — they grant the right to buy company shares at a predefined price.

What does the strike price mean?

The strike price (also called exercise price) is the fixed price at which the option holder can buy or sell the underlying shares. For employee options it is usually set at the share's fair market value on the grant date. The profit potential depends on how the market price moves relative to this strike.

What is the premium and who pays it?

On public exchanges, the premium is the price the buyer of the option pays to the seller (writer) for the right embedded in the contract. For employee stock options, there is usually no cash premium — the option is granted as part of compensation, but the employee normally has to pay the strike price when exercising.

What happens if I leave the company before vesting completes?

In most plans, unvested options are forfeited the day you leave. Vested options typically remain exercisable for a limited post-termination window — often around 90 days — after which they expire if not exercised. The exact rules are defined in the plan documents and grant agreement.

Are stock options taxed when granted or when exercised?

Tax treatment depends on the jurisdiction and option type. In Poland, the spread between market value and strike price is typically taxable at exercise under the personal income tax scale, and any subsequent gain on sale is taxed as capital gain. Specific cases differ and consulting a tax advisor is recommended.