As a consultant, there is occasionally an offer to buy stock from a junior mineral exploration client for a set price over a certain length of time. Are these deals worth following through on? Short answer: no.
Let's take a look at stock options and the terminology used in the agreement.
A stock option agreement is a special contract used as a bonus incentive to attract and keep good talent so that they are encouraged to be engaged in the health of the company over time. The terms, conditions and amounts are typically set out by the Board of Directors, as part of a Stock Option Plan, and a Notice of Stock Option Grant may be listed with the appropriate regulatory body.
*Each governing body will have their own rules regarding stock option agreements so be sure to research their specific requirements.*
A stock option agreement may consist of terms which help to define the deal including: grant date, exercise or strike or option price, expiration date, exercise date, vesting period or schedule or requirements, cliff, waiting period and clawback provisions. This agreement dictates the terms in which you may purchase shares from the company, if you chose to, and is not an obligation that you must purchase the shares.
The Grant Date is the month, day and year in which the option agreement begins.
The Exercise or Strike or Option Price is the value of the shares that you can buy and will include how many Shares in Total you may purchase through the agreement. The price is calculated to be the fair market value and may be larger or smaller than the current market price. Your option agreement may have a different price associated with the shares than someone else's agreement and the number of shares available for you to purchase will vary between agreements (i.e., not all executives, consultants or employees will get the same terms).
The Expiration Date is the month, day and year the option to purchase shares through the agreement ends. This means there is a time limit to the availability of the shares through the option agreement.
The Exercise Date is the month, day and year you 'exercise your options' meaning the date you decide to purchase an amount of shares through the agreement.
The Vesting Period or Schedule or Requirements is a condition applied to how many shares can be purchased as time goes by. Often, you cannot buy shares immediately upon receipt of the option agreement and there is typically a percentage of the total number of shares that become available over time. For example, if 10 % of the total number of shares granted are available every 2 months this would mean that you could purchase 10 % of the shares every 2 months after the Grant Date, or 20 % of shares after 4 months or you could decide to purchase the total number of shares available to you 20 months after the Grant Date.
The Cliff defines the amount of time before any shares can be purchased through the option agreement. This is more common for employees and intervals may be in terms of months to a full year before the vesting schedule begins.
A Waiting Period is the length of time you have to wait between buying the shares and selling. This limitation is occasionally specified as part of the option agreement.
Clawback Provisions are conditions in which the company may revert some of the shares that have not been already purchased in the event of a company bankruptcy or employee termination, etc.
Are stock options worth it for mineral exploration consultants?
First off, congratulations! Your client has chosen to show you appreciation for all the work you've done and offered you a bonus.
Second, you need to ask yourself a series of questions to see if it's worth your hard-earned money to chose to exercise your option agreement and essentially buy into the company:
Is the company worth investing into?
Even though stock options are considered a bonus, they should be treated using the same evaluation conditions you would use when considering to invest in any company. Visual Capitalist has great infographics and an informative series on investing in mining companies that can be applied to mineral exploration companies.
Are you currently required to keep an arms-length relationship with the company?
If you are responsible for work that requires disclosure of your relationship with the company then owning stock in the company may require further thought as to how it may be seen to affect your independence.
What percentage of current and potential future income is the total amount of the option worth?
If the value of your potential future work at the company is smaller than the value of the total shares offered, you may want to consider if you're comfortable paying the company back more than they would be paying you. If the total value of the stock option is greater than the money you've made from working for the company, you would still need to consider how much of your hard-earned money is worth investing in the company.
Does your position directly influence the success of the company?
Most consultants and employees are hired for specific tasks such as collecting samples or writing reports. This work doesn't directly influence the success of the company and your chance of improving the health of the company is very small. If you are part of the technical team that evaluates potential projects, plans exploration programs or finds investors then how well you did these tasks would directly influence the success of the company and exercising your option agreement may be worth it.
Are you fully aware of the tax laws associated with your stock options?
If you buy shares through your stock options and then sold them, then you need to be aware of how much you would have to pay in tax on the sale. This is especially important to consider if you have taken out a loan to purchase the shares, then sold the shares at a higher price to repay the loan and make a little bit of profit.
Are stock options worth following through on? Long answer: maybe.
In the end the decision is entirely dependent on your personal situation, your financial risk levels and how much confidence you have that the company's stock prices will rise.
References and Further Reading
About the Author:
Dr. Diana Benz has 24 years of experience working in the mineral exploration industry searching for diamonds and metals in a range of roles: from heavy minerals lab technician to till sampler, rig geologist, project manager and business owner. She has a Bachelor of Science in General Biology, a Master of Science in Earth Sciences researching diamond indicator mineral geochemistry and a Ph.D. in Natural Resources and Environmental Studies using geochemical multivariate statistical analysis techniques to interpret biogeochemical data for mineral exploration. Diana has conducted field work in Canada (BC, NWT, YT and ON) as well as in Greenland. She has also been involved, remotely through a BC-based office, on mineral exploration projects located in South America, Africa, Eurasia, Australia and the Middle East. Currently, Diana is the owner of Takom Exploration Ltd., a small geological and environmental consulting firm focused on metal exploration in BC and the Yukon.