Salary.com's compensation experts have put together a checklist of the ten most important questions you should be able to answer about your stock options. Use this checklist as you prepare your research for a salary negotiation, or at your next performance review, or when you are in line for a promotion. Some of these questions are essential to understanding the value of your stock options award, and others simply help explain the implications of certain events or situations.

Don't be surprised if you have options now and can't answer some of these questions - they're not all obvious, even to people who have received stock options before.

The answers provided here are relevant for people from the United States. If you are not from the United States, the tax information and some of the trends discussed may not be relevant to your country.

The ten most important questions about your stock options are as follows.

• What type of options have you been offered?
• How many options do you get?
• How many shares in the company are outstanding and how many have been approved?
• What is your strike price?
• How liquid are your options, or how liquid will they be?
• What is the vesting schedule for your shares?
• Will you get accelerated vesting if your company is acquired or merges with another company?
• How long must you hold your shares after an IPO, merger, or acquisition?
• When you exercise your options, do you need to pay with cash, or will the company float you the exercise price?
• What kinds of statements and forms do you get or do you need to fill out?

1. What type of options have you been offered?
In the United States, there are essentially two types of stock options: incentive stock options (ISOs) and nonqualified stock options (NQSOs). The primary difference between the two with respect to the option holder is the tax treatment when the option is exercised.

When you exercise ISOs, you do not normally have to pay any taxes (although there is a chance you may be required to pay an alternative minimum tax if your gain is large enough and/or certain other circumstances apply). You will eventually have to pay taxes on this gain, but not until you sell the stock, at which time you will pay capital gains taxes (the lesser of your marginal rate or 20 percent) on the total gain - the difference between the amount you paid to exercise the option and the amount for which you ultimately sold the stock.

Remember, though, you must hold the stock for at least a year after you exercise the option to protect this tax break. Otherwise your incentive stock option will automatically become a nonqualified stock option and you will have to pay ordinary income tax.

When you exercise nonqualified stock options, you are required to pay ordinary income taxes on your gain as of the time you exercise the option. This tax is based on your marginal tax rate (between 15 and 39.6 percent). When you eventually sell the stock, you will have to pay capital gains taxes (the lesser of your marginal rate and 20 percent) on the gain you realize between the market price on the day you exercise and the market price on the day you sell the stock.

Insights. Companies offer nonqualified stock options for a few reasons. There are a number of restrictions on when and how many incentive stock options a company can grant, as well as the conditions for those options. For example, if the company issues stock options with an exercise price below the actual share price, those options cannot be incentive stock options. Also, the company receives a tax deduction for nonqualified stock options, but not for incentive stock options. The deduction helps reduce the company's tax burden and therefore can help increase the value of the stock.

2. How many options do you get?
The number of stock options you receive is a function of several variables. Option grant sizes depend on your job, the frequency of the grants, the industry, the company's pay philosophy, the company's size, the company's maturity, and other factors. In a high-tech startup, for example, the grant you receive is generally much larger as a percent of the company's total shares outstanding than a grant you would receive from a more mature, established company. But often when a company is awarding a large number of shares, it is because there is more risk associated with them.

Insights. People often have a hard time comparing option grants from various job offers. Don't focus solely on the number of shares you're being granted. Try to keep in mind their potential value to you and the likelihood that they'll achieve that value. For a startup, your options may have an exercise price of $5 or $1 or even 5 cents per share, but at some point a year or two from now, those shares could be worth $50 or $20 or $10 or even nothing. Presumably less risky are options from mature companies that provide more stability but also less chance of a "home run." In these companies, look at the exercise price of the options and how you think the stock will perform over some period of time. And remember, a 10 percent increase in a $50 stock is worth $5, whereas a 10 percent increase in a $20 stock is worth $2.

3. How many shares in the company are outstanding and how many have been approved?
The number of shares outstanding is an important issue if your company is a startup, because it is important to gauge your option shares as a potential ownership percentage of the company. For most people, this percent will be very small - often less than half a percent. It is also important to know the number of shares approved but not issued.

Insights. Although this number is most relevant to startups, it is relevant to everyone because approved but unissued shares dilute everyone's ownership. If the number is large, it could be an issue. Dilution means each share becomes worth less because there are more shares that must make up the same total value.

4. What is your strike price?
The strike price of an option - also called the "exercise price" or "purchase price" - is often the price of a share of stock on the day the option is granted. It does not have to be the share price, but it often is. This is the price you will eventually pay to exercise your option and buy the stock.

If an option is granted above or below the stock price on the day of the grant, it is called a "premium option" or a "discounted option," respectively. Discounted options cannot be incentive stock options.

Insights. Companies that are not publicly traded (traded on a stock market or "over the counter") may still have stock options, which do have a stock value. The fair market value of a share of stock in one of these companies is normally determined by a formula, by the board of directors, or by an independent valuation of the company. If you are working at one of these companies, you should ask how the share price is determined and how often. This will help you understand what your options are worth.

When you are negotiating, don't be surprised if the company representative tells you they cannot award you options below the current stock price. Although it is legal to do, and many plans allow for it, many companies have the policy of not awarding options below fair market value and they don't want to set a precedent. The number of shares you receive and the vesting are typically easier to negotiate than the strike price.

5. How liquid are your options, or how liquid will they be?
Here, liquidity refers to how easy it is to exercise your stock options and to sell the shares. The primary issue here is whether your company's stock is publicly traded. If so, there are thousands of investors looking to buy or sell those shares on any given day, so the market for those shares is said to be liquid.

Certain other companies, including partnerships, closely held companies, and privately held companies, normally have restrictions on whom you can sell your stock to. Often it is only to one of the existing shareholders, and it may be at a formula or fixed price.

Insights. A stock that is illiquid can still be quite valuable. Many companies with low valuations and illiquid stocks over the past few years have either been acquired or gone public, greatly increasing the value and/or the liquidity for the option holders. These types of "liquidity events" are never guaranteed, but they are always possible.

6. What is the vesting schedule for your shares?
Vesting is the right you earn to the options you have been granted. Vesting normally takes place over time, but may also be earned based on certain performance measures. The concept is basically the same as vesting in a retirement plan. You are awarded a benefit - in this case, stock options. Over some period of time, you earn the right to keep them. If you leave the company before that time has passed, you forfeit the unvested options. The current trend is for options to vest in monthly, quarterly, or annual increments over three to five years. For example, your options may vest 20 percent per year over five years, or they may vest 2.78 percent per month for 3 years (36 months).

Insights. Vesting seems to be trending toward shorter schedules with smaller increments (e.g., monthly over 3 years rather than annually over 5 years). Companies try to keep consistent option terms for people at similar levels, but vesting terms for stock options are sometimes negotiable, especially special grants for new hires and special recognition awards. Once an option is vested, it's yours regardless of when or why you leave the company. So the faster your options vest, the greater your flexibility.

7. Will you get accelerated vesting if your company is acquired or merges with another company?
Sometimes, upon certain "changes in control" of a company, stock option vesting schedules accelerate partially or fully as a reward to the employees for increasing the value of the company, or as protection against future unknowns. Usually these events do not trigger full vesting, because the unvested options are one of the ways the new company has of keeping the employees it needs. After all, often the employees are one important reason for the merger or acquisition.

Some companies also provide an increase in vesting at the IPO, but that is normally a partial increase rather than full immediate vesting.

Insights. It is important to know whether you get accelerated vesting so that you fully understand the value of your options. But unless you are a senior executive or a person with a very important and hard-to-replace skill, it is difficult to negotiate any acceleration above and beyond the plan's stated terms.

8. How long must you hold your shares after an IPO, a merger, or an acquisition?
If your company merges or is acquired, or if it goes public, you may not be able to sell your shares right away. The length of time you must hold your shares after an IPO or merger depends on the SEC (Securities and Exchange Commission) and individual company restrictions. Review your option agreement, plan documents, and any pre-IPO or premerger communications for descriptions of any holding period or lockout period.

Insights. Although you can't change the lockout period, you can use it to plan how you will use the proceeds from any sale of stock. Note that the price of a company's stock sometimes decreases on or after the day a lockout period ends, as employees sell their shares in large numbers. If you want to sell after a lockout period, and the price decreases, you might benefit from waiting a little longer until it stabilizes, provided the stock is performing well in other respects.

9. When you exercise your options, do you need to pay with cash, or will the company float you the exercise price?
Depending on the company you work for and the terms of the stock option plan, you may be able to exercise your options in one of three ways: by paying the exercise price out of your own checking account; by borrowing the money in a bridge loan from your company; or by completing a cashless transaction that allows you to receive the net number of shares you would end up with had you borrowed the money to exercise the options and sold just enough shares to pay back the borrowed money. For the second and third alternatives, you should know whether any taxes you owe can be paid from the loan or cashless exercise.

Insights. If you must pay the cost of the exercise, you may need a significant amount of cash. To preserve the favorable accounting treatment of any incentive stock options you exercise, you will not be able to sell the stock for a full year. Well before you exercise your options, you should consider contacting a financial advisor to determine the best approach for given your financial situation.

10. What kinds of statements and forms do you get or do you need to fill out?
Some companies provide a regular statement or even a daily update on your company intranet summarizing your holdings, what's vested and what's not, the value of each based on the current stock price, and perhaps even an indication of the after-tax gain. Other companies give only an initial option agreement with no updates until the option term is about to expire or you are about to leave the company.

Insights. Whether the company provides updates for you or not, be sure you receive, in writing, a dated statement from the company that tells you how many options you have been awarded, the exercise price, the vesting schedule, the expiration date, exercise alternatives, terms for changes of control, and terms for adjusting based on reorganization.

This last issue is important because if the company's stock splits or mergers with another company's stock, your stock options should be adjusted accordingly to make sure your financial position is maintained.

Be sure to keep all option agreements. These are legal contracts, and should there ever be an issue over what you've been promised, that statement will help protect your rights.

- Johanna Schlegel, Salary.com Editor-in-Chief