Employee stock options--- I am really confused!! Need help...?

So my company is offering me 5000 stock options to be at a $1 a piece. In the rules agreement, it says that the vesting period is 4 years and if I quit before then I do not get a payout. Does that mean my initial investment (if I choose to buy 5000 at $1 a piece now) will also be lost or do they just not pay out the appreciation?

you pay $0 now.

in 4 years you have the RIGHT (if you still work there) to buy 5000 shares at $1/each, but you do not HAVE to.

A stock option is a contract that gives you the option to purchase a certain number of shares at a predetermined price (the strike price). Apparently the strike price of each share is $1. So, the idea is that if you exercise your option contract, you can purchase up to 5000 shares directly from your company that day for $1 each, regardless of the current market price. You can then either keep the shares, or usually resell them back to the company at the current market price. If the current market price is more than $1 per share, then you have made an instant, risk-free profit.

Vested simply means that you own the contract. Apparently you must work for 4 years before the contract is available to you. If you terminate employment before your 4 year period, the contract is null and you are no longer given the option to purchase shares for $1. It's an "all-or-nothing" situation.

If you have not worked for the company for 4 years, then you cannot exercise your options contract now.

If you do exercise your options contract, be sure to consult a tax expert when you file that year's income tax return. They can help you with the capital gains tax you will have to pay.

You're not actually investing anything. Basically, they are granting you 5,000 options - meaning you have an option to buy them when they vest. You're not paying anything nor will you with these. 25% will start vesting after you have completed a year of employment. Typically you get 1/12 of that 25% each month starting after the first year. But you don't pay. The problem is you could be under water. If the value when you vest is more then the dolar you paid for it, then you get the difference, without coming out of pocket, when you "excercise" the options. So at the end of your 2nd year, you will have 25% of 5,000 options available for vesting: so 1,250 options. If your buy price, known as "strike" price is $5, then each option is worth $4 to you. So you will be able to excercise $5,000 worth of options at the end of year 2, your first vesting year. Let me know if you need more clarification.