Options & Vesting, in CVS Coupon Terms
There are two types of people in this world. There are the ones who throw away the CVS receipt immediately after it dispenses from the machine. And then there are the ones (like me) who eagerly rummage through the 5 foot long paper to find the coupons at the end. This one’s for you.
Imagine an option like a CVS coupon. The coupon states that you can buy a Dove body wash for $5.
The next day, you walk into the store and see that that same bottle of Dove body wash costs $8. Since you have your coupon, you are able to pay $5 for the soap, while everyone else must pay $8.
Therefore, the value of your coupon is essentially $3 ($8 current price less the $5 coupon price).
Sometimes, coupons are not activated immediately and you have to wait until a certain date to use them.
Imagine that the coupon says it is not valid for one week. After a week, you can use the coupon to buy a Dove body wash at the $5 price.
In an ideal world, the cost of the Dove body wash increases as the days go on so that your coupon gains value over time.
Let’s say the price jumps to $8 after a week. At that point, you can use your coupon and buy the soap for a savings of $3. If you sell your soap for “market price” to the woman behind you on line, you will make $3 on that sale.
Using the same logic, let’s discuss options in terms of an offer letter.
You are granted an offer with 1 option with a strike price of $5 and a 1 year vest. This means that you can buy 1 share for $5 per share after you spend 1 year at the company.
If after 1 year, the company valuation goes up and the price jumps to $8, you can exercise your option and buy the shares at the cheaper price of $5.
If you have 2 options, you can do this twice.
Let’s say you actually get 5 of these options — you would therefore have a gain of $15 ($3*5 options). The difference between the option price and the actual price is the spread.
There are many more nuances to options and each option agreement is different so it’s really important to evaluate on a case by case basis (and even consult a lawyer or accountant if possible), but I wanted to provide simplified analogy to help break down the basics of options and vesting.
