As you have probably observed by now, employee stock options are complex and don't lend themselves to simple answers. Because every person's situation is unique and there can be great differences in option grants, I address issues I believe are applicable to most people.

Again, I caution you that the information presented here is not meant as a substitute for expert legal, financial, or tax advice. You should always consult an expert before making complex financial decisions.

There are often special conditions that come into play when beginning or ending a job with a company that offers employee stock options. Following are some common questions about these situations.

Question: I plan to leave my company soon. Is there any way to protect or exercise unvested options?

Answer: Probably not. Most option grants very specifically cancel any unvested options or stock when you leave the employment of the company for reasons other than retirement, death, or disability. In addition, your vested options may be at risk, as well as any profits you received from options before leaving.

More and more companies are writing noncompete clauses into their option grants to discourage employees from leaving. This can come in the form of a loss of all options as well as recovering profits from any transaction in the recent past.

Question: How do I know how many options to ask for from my new employer? What is the standard amount?

Answer: Unfortunately, the answer isn't very simple. If a search firm recruited you, the recruiters may have some idea. Generally, companies are going to be fairly evenhanded with providing options. They know employees talk, and it would not be good for morale to find out some employees got a better deal than others of the same rank.

The younger the company, the more eager it will be to pay bonuses and other incentive pay in options. Options may dilute ownership somewhat, but cash is a much more precious commodity. You may find the company willing to give you more stock options in lieu of a cash bonus. It never hurts to ask.

Question: What happens to my options if I am fired?

Answer: More than likely you can kiss them good-bye. Many option grants contain clauses that wipe out any options you have in the event of termination with cause. In other situations, you may have the right to exercise your vested options, but in almost all cases, unvested options will disappear.

Some states have strict employer-weighted laws that allow them to fire you for any reason at any time. In these states, you work "at the will" of your employer. Other states may require more of the employer before it terminates you.

It is possible for some give-and-take here, but usually employees who are fired don't have much bargaining power.

Question: I am a part-time employee. Am I eligible for stock options?

Answer: Generally, there is nothing that would prohibit a company from granting you stock options. As a practical matter, most grants are for full-time employees.

Administering an option's grant for full-time employees is complicated enough without opening it up to part-time employees. However, if you are a full-time employee at the time of the grant and later switch to part-time, your employer may adjust your vesting schedule or reduce the number of options you receive.

I certainly would read the grant option carefully and discuss your concerns with the grant administrator before you make the switch.

Question: This great job is available, but if I leave my employer I will lose a lot of stock options. What should I do?

Answer: You can ask your new employer to replace what you lost to come to work there. It doesn't always work, but if the company wants you bad enough, it will replace what you lose in kind or somehow attempt to help you recover your loss. Be advised, however, that the new employer is under no obligation to do this.

Check your options grant for details and time frame for exercising vested options before you leave.

Employee stock purchase plans are a popular benefit. They are usually easier to understand than options programs, although questions do arise. Here are some of the more common questions and answers.

Question: What if I change my mind during the offering period and want out of the program?

Answer: In most cases, your employer will allow you out of an employee stock purchase plan (ESPP) during the offering period. You will get back the money deducted from your pay, but probably without any interest.

Question: What if I change my mind during the offering period and want to join the program?

Answer: You will probably not be able to join during the offering program. ESPPs are set up to provide a period for joining, known as the enrollment date. You may enroll before this date, but not after it. Once the offering period has begun, enrollment closes until that period ends and a new enrollment period begins for a new grant.

Question: How much of a discount will I get on the stock I buy through an ESPP?

Answer: There is no fixed amount and, in fact, you may not get any discount at all. However, many plans offer a 15-percent discount. Your actual discount from fair market value can be quite a bit more.

Remember that you pay 85 percent of either the value of the stock at the beginning of the offering period or the value of the stock at the end of the offering period. Whichever one is lower is the discounted price.

If the stock increases significantly during the offering period, you could end up with a bigger discount than 15 percent. If the stock drops significantly during the offering period, you still get the discount off the lower current price. Either way, it's hard to lose.

Question: If I leave the company during an offering period, what happens to the stock I already own and the accumulated money?

Answer: You should be able to keep the stock you own. You get back any money collected during an offering period, but not used to purchase stock.

Question: How much do I have to put in each pay period? What are the maximum and minimum?

Answer: First, you don't have to put anything into the plan. Employee stock purchase plans are completely voluntary. However, they are a good deal and you should seriously consider participating.

If you want to participate, the minimum contribution is 1 percent of your salary. The maximum you can contribute is 15 percent. Tax code puts a limit of $25,000 per year of stock regardless of the percentage you contribute.

Question: Is the money withheld from my salary pretax such as that withheld for a 401(k) plan?

Answer: The money withheld from your salary is after-tax dollars; that is, after deducting withholding and other taxes from your gross pay, the money goes into the employee stock purchase plan.

These plans are not qualified retirement plans and do not earn special tax consideration as 401(k) plans do.

One of the most difficult decisions is how and when to exercise your options. Following are some common questions and answers.

Question: My employer doesn't offer a cashless exercise. Isn't that against the law?

Answer: No, not at all. Your employer can choose any method or methods of exercise. Most publicly traded companies do offer a cashless exercise, but law does not require it.

Privately held companies almost never have this option, since there is no ready market for the stock. (See the next question.)

Question: I work for a privately held company. What alternatives do I have for exercising my options?

Answer: Since there is no ready market for private stock, some companies have adopted a strategy of loaning the employee enough money to buy the stock and pay the necessary taxes.

Although it is complicated, private companies do use options effectively. Consult your plan administrator to explore other alternative means of exercising your options.

Question: Can I borrow money from my retirement plan—401(k) or IRA—to exercise my options?

Answer: This is almost never a good idea. Most 401(k) plans permit loans in the case of financial hardship and few administrators would consider exercising stock options a hardship.

There is a way to pull cash out of your IRA for a period of less than 60 days, but if you don't document it correctly or fail to repay the IRA before the 60 days are up, you will face some harsh tax penalties. Even if you did use cash from your IRA to exercise the option, you would have to sell most of the stock to repay the money before the 60-day time limit.

Question: My option grant says they are "reload" options. What are they?

Answer: Reload options are a special type of option that comes into play when you use company stock you own to exercise your options.

The reload option grants another option for the same number of shares used to exercise and has an exercise price equal to the fair market value of the stock on that day. The option grant may specify that only the shares used for exercise be reloaded, while other plans may reload the shares used to cover the taxes.

Question: My company granted vested options, but imposed a six-month blackout period. What's up with that?

Answer: There can be several reasons for the blackout period, sometimes called a lockup or lockout period. Companies about to make an initial public offering or that have just completed one often prohibit employees from exercising options or selling stock.

The concern is that investors might lose confidence in the young company if employees start dumping shares on the market.

Executives and officers in sensitive positions have permanent restrictions on what they can do with options and shares of stock. This is particularly true around the end of a fiscal quarter or year when these officers may have inside knowledge not available to the public. During these periods, the company often forbids officers, executives, and employees in sensitive positions from buying or selling company shares. (See the following section on insider trading.)

If you think insider trading is a white-collar crime just committed by crooked officers, think again. You may be an insider and subject to restrictions on how you handle company stock and options.

Question: Who is an insider?

Answer: The law considers someone an insider if he has access to information unavailable to the public that might influence the stock's price.

Officers, executives, and directors are by definition insiders. However, the definition doesn't stop there. If you are an insider, it is likely your company's legal counsel has told you so and given you a set of guidelines to follow.

If you have any questions about your status, ask the legal department for clarification.

This is fairly important, because if the court considers you an insider and you buy or sell stock based on your inside knowledge, you could face stiff civil and criminal penalties, including jail time.

Question: How wide does the insider trading net extend?

Answer: Obviously, if you trade on insider information, it's grounds for civil or criminal action. Even if you just tell a friend or relative and don't profit from their trade yourself, you are still guilty.

This is one of the most common civil and criminal violations in the securities business. Government officials look for unusual trading patterns right before or after a significant event in an attempt to catch people trading on inside information.

One of the basic precepts of the stock market is that every investor has access to the same information at the same time. How investors interpret the information is their business, but no one should have an unfair advantage because he has access to news that is not available to the public.

Question: Does the insider trading rule cover me after I leave the company?

Answer: Yes, the rule covers you for however long you possess material information that is not available to the public. Leaving the company does not get you off the hook.

It is also not a good idea to trade on the information as soon as it becomes public. For example, the information released at 9:30 A.M. followed by your trade at 9:31 A.M. would be suspect. Check with legal counsel for advice on timing of your trades.

The Securities and Exchange Commission (SEC) takes insider-trading charges very seriously. You don't want even the appearance of impropriety when it comes to securities laws.

Question: The legal counsel at our company warned us (executives) against "short-swing profits." How can I avoid this liability?

Answer: The short-swing profit rules match trades within a six-month period forward and backward. For example, if you buy your company stock for $75 per share in April and sell it at $90 per share in July, you have made a short-swing profit.

Under this example, you would owe your company the $15 per share profit.

Exercising an option does not violate the short-swing profit rule, but if you sell the stock on the open market, the sale is matched with any purchases in the previous six months and matched with any sales in the coming six months.

It is a good rule of thumb that insiders should consult legal counsel before any purchases or sales to make sure they are not in violation of any securities fraud laws.

Question: It seems as though if you are an officer or other insider it is impossible to trade your company's stock without violating some securities law. Is that true?

Answer: It is not quite that bad. However, you must avoid the appearance or reality of illegal insider trading. Company officials buy and sell stock all the time without any trouble.

If you look at the financial section of your newspaper or on the Internet, you will find reports of insider trading. These are perfectly legal trades made by company officials. In the interest of full disclosure, insiders must file a form with the SEC listing their trades.

The sense is that disclosing this information may have a material effect on the stock's price. That is why you will sometimes see news reports of trades by a company official that list a reason for the activity, especially if the official is selling stock.

It is not uncommon to see reports that an official sold a certain number of shares to pay college tuition or buy a new house. The company wants investors to know that the sale has nothing to do with the financial condition of the company.

Estate planning is not a "do-it-yourself" activity if you have extensive assets, including vested options. These questions and answers will point you in the right direction.

Question: What happens to my vested options if I die?

Answer: That depends on how your options grant. Most plans allow your estate or heirs to exercise vested options, although there is sometimes a time limit to do this. One year is common.

It is important to understand what your grant allows and to share that information, in writing, with your family or the attorney who will handle your estate. A copy of the options grant should be with your will and other important papers.

If you work for a private company, its options grant may call for an immediate buyback at some predetermined value. Check with your plan administrator and legal counsel about how to structure the settlement.

Question: What about unvested options?

Answer: Check your plan, but in almost all cases, you forfeit unvested options when your employment ends, even by death. If a disability forces you out of your job, there may be special rules in the grant options to extend vesting. However each plan can be different.

Question: Are vested options included in a person's estate at death?

Answer: Yes.

Question: How are options taxed in a person's estate?

Answer: Vested but unexercised options are included in your estate along with all your other assets. If the sum of those assets exceeds $675,000, your estate will pay tax on that amount.

The value of vested options is determined by using an option's pricing model such as the Black-Scholes calculator, used in the industry to consider all the factors of an option and arrive at a value.

These models are more applicable to options traded on the stock exchanges, since there usually is no market of employee stock options. These options have no real value until they exercise unlike publicly traded options bought and sold on the open market.

Question: Are nonqualified stock options and incentive stock options treated the same for estate and income tax purposes?

Answer: No. The tax code treats them differently for income tax purposes. The explanation is too long to include here, but be sure the tax counsel you are using understands the difference.

It is best to plan this beforehand, since there may be some timing strategies that will help reduce the estate tax, which is probably going to be the larger of the two taxes.

Many companies have special provisions in their option grants for what happens if an employee becomes disabled. Hopefully, you won't have to face this situation; however, you should know the provisions and make your family aware of them.

Question: What happens to my options if I become disabled and am unable to continue working?

Answer: That is up to your options plan. You usually have longer to exercise your vested options than if you were laid off or fired. Many plans give you up to a year from the date of your status changing.

Some plans may allow vesting to continue during this period, while other plans do not. Almost all companies consider your employment terminated when you are completely disabled.

Companies often use the definitions from their insurance plans to specify what a complete disability is.

The options plan may have different rules for nonqualified stock options and incentive stock options. This is another good reason to keep a copy of the options grant in a safe place with your will and other important papers.

What happens if you wake up one morning to find that another company has bought your employer? You will have a lot of questions about your benefits. Following are some questions and answers about your options.

Question: What happens to my options if another company buys my employer?

Answer: That depends on many factors, but you might get options on the acquiring company stock in exchange or you might get cash for your existing vested options.

Unvested options are almost always canceled. It will be up to the new owner to either continue the options' grants or not.

Question: What are the tax consequences on my options of another company buying my company?

Answer: The buyer may settle with all vested option holders with a cash payment. You would report this cash as ordinary income on the taxes for that year.

If the acquiring company keeps your options plan, you don't owe any taxes. Some companies may exchange your options for new options in the acquiring company's stock. This usually does not precipitate a tax bill. However, it is always wise to seek expert advice in these situations if the company does not provide you with guidelines.

Question: A publicly traded company has bought the private company I work for. How are my vested options affected?

Answer: The answer will depend on how the deal was structured. It is common in these situations to swap publicly traded stock for private stock. In this case, you might receive shares or options of equal value in the acquiring company.

This may be a good deal, since there exists a better market for the publicly traded stock. It is also possible that you will receive a cash settlement of some sort based on the value of the private company's stock.

The acquisition establishes the value of the private company's stock.

Vesting schedules determine when you can actually benefit from your stock options. Here are some key answers to common vesting issues.

Question: What are the different vesting schedules?

Answer: There are three types of vesting schedules that companies can use, although there may be variations on the three. How companies design vesting schedules is their decision with no particular set of rules to follow. The three types are:

Question: Are vesting schedules and numbers of options negotiable?

Answer: They might be if the option plan doesn't have specific language about vesting and the number of options. There is no rule that says every employee must have the same schedule.

However, companies use broad-based plans to avoid negotiating with every employee, so unless you are an executive or some highly skilled technical person, it is unlikely you will negotiate a separate deal.

Bargaining units and unions can negotiate on behalf of the workers they represent for a plan that may be unique to those workers.

Question: What is the possibility of negotiating an accelerated vesting schedule?

Answer: Some workers who take early retirement or leave due to job cutbacks can always negotiate the severance package. However there are some accounting ramifications that the company needs to keep in mind that may make accelerating vesting unattractive.

It never hurts to ask, and if you are successful, it could mean a substantial benefit to you.

For example, say you have unvested options for 5,000 shares of stock at $15 per share and the current market value is $35 per share. Accelerating the vesting would give you a potential benefit of $100,000 before taxes if you chose to sell the shares.

Question: Are my vested options absolutely guaranteed?

Answer: No, they are not. There are circumstances when you could forfeit your vested options. One of these circumstances is if you leave the company and join a competitor.

An increasing number of options plans have provisions that allow the company to take back any options you have if you go to work for a competitor. They can even get profits you have made from the sale of the stock.

These provisions are called callbacks or claw-backs. Read your options agreement carefully to see if it contains any such language before you jump ship.

Selling your stock is how options finally put money in your pocket. Keep the questions and answers below in mind when it comes time to take the cash.

Question: How does a cashless transaction work?

Answer: This is one of the most common ways for people to cash out of their options. A brokerage firm appointed by your employer "lends" you the money to exercise the options and immediately sells the stock for you. It repays itself plus a commission, and you get what is left.

Despite the fees involved, this is the most efficient way to exercise your options and sell the stock.

Question: How long should I wait before exercising my options and selling the stock?

Answer: Unfortunately, there's no single answer that is right for everyone. You need to put your whole financial situation on the table and look at all the pieces as they relate to each other.

If this sounds overwhelming, you might consider using a financial planner to help you sort out the details. If you go this route, only use fee-based financial planners. You will pay more, but they won't try to sell you products you don't need for a commission.

Question: How important are tax considerations in the decision to sell or not?

Answer: They are very important because taxes take the biggest bite out of your gross profits of all the expenses associated with exercising options and selling the stock.

You want to think about how you can keep your taxes as low as possible. To do that, you must know your tax bracket and whether the tax is ordinary income or long-term capital gain. Later in life, potential estate taxes can destroy all you have spent a lifetime working toward.