The startup dotcom work world has brought with it a host of new compensation issues to consider, including my personal favorite: stock options. Of course you've heard about longtime AOL and Amazon employees who became millionaires after cashing in their stock options, but is it realistic to think that the same will happen to you? Probably not; but even if you don't end up with big bucks, it's a good idea to understand how to make the most of what's being offered to you.

According to Denise Derbyshire, director of corporate staffing at Bethesda, Maryland-based AppNet, companies typically use stock option plans as a way to reward top management and "key" employees, by linking their interests with those of the company and other shareholders. "AppNet considers all employees to be key, so stock options are offered to all employees. Because we use stock options to attract the best employees, it is especially critical that we effectively communicate to potential candidates what they need to know to understand the value of their option packages," she says. This is solid advice for anyone evaluating stock options: Make sure your company explains the plan to you in detail, and don't be afraid to ask questions and/or voice your concerns.

"AppNet is a good example of what you should be looking for when evaluating the worth of stock options," says Derbyshire. The company announced its IPO in June offering 6,000,000 shares of common stock at $12 per share. Now, a few months later, many of the company's employees are reaping significant financial rewards. "The talent, dedication and high quality of our people has been evidenced in our surging stock price," she continues. "A few months ago, we were at $18 a share, and now, at the end of the year, we are in the $50s, with top investment banking firms in our space giving us buy ratings and 12-month price targets at $70-$75 per share."

Cashing in
Obviously, the more attractive the company is to Wall Street, the more money an employee could potentially walk away with. "Employees who have been granted stock options hope that the share price will go up and that they will be able to 'cash in' by purchasing the stock at the lower grant price and then selling the stock at the higher exercise price," says Derbyshire.

Once a company decides to offer options, it must decide who will get them and how many each employee will receive. That process is called "allocation." Stock options are generally offered as part of or in combination with other qualified employee benefit plans. For example, investment options in a 401(k) might include stock purchase, and "matched" contributions or profit-sharing benefits might take the form of company stock.

"In general, a stock option gives an employee the right to buy a certain number of shares in the company at a fixed price for a certain number of years," explains Derbyshire. The price at which the option is provided is called the "grant" price and is usually the market price at the time the options are granted. Most options have vesting schedules, meaning an employee has to wait a few years before all the options can be used. There are two types of vesting: "cliff vesting," in which employees become fully vested all at once after a specified period (usually about five years), and "graded vesting," which vests employees gradually over time. Graded vesting generally takes longer, but percentage increments occur sooner.

Although a vesting period can range considerably -- with seven years being the maximum allowed by law -- four years is the most common vesting schedule. For example, at AppNet, employees vest over a four-year period at 25% a year. ZapMe! -- a San Ramon, California-based provider of free PCs, quality educational content and satellite-delivered Internet access to middle schools and high schools nationwide -- also has a four-year vesting period.

"Employees are graded based on tenure -- on an anniversary basis," says Sandra Bowen, director of human resources at ZapMe! "One quarter of the options vest on the first anniversary of hire, and then monthly thereafter." The company, which was founded in 1996, went public in October of this year with an offering price of $11 per share. Just a month later, the stock price was hovering close to the initial price; but Bowen feels that the future is bright. In the meantime, new employees still have a chance to get in on the action.

Terms to Know Allocation: The process of deciding who will get stock options and how many each employee will receive. Grant price: The price at which the option is provided. It's usually the market price at the time the options are granted. Hot issue: An IPO that is in great public demand. Hot stock: An issue that rises quickly in price. Insider trading: Shares bought or sold by the company's management or board of directors, or by individuals that own more than 10% of the company's shares. Initial public offering (IPO): The first time a company sells stock to the public. An IPO is a type of primary offering, which occurs whenever a company sells new stock; and it differs from a secondary offering, which is the public sale of previously issued securities, usually held by insiders. Offering price: The price that investors who are allocated shares in an IPO must pay. This is not the same as the opening price, which is the first trade price of a new stock. Quiet period: The time period in which companies are forbidden by the Securities & Exchange Commission to say anything not included in their prospectus, which could be interpreted as hyping an offering. This period begins the day a company files an S-1 registration statement and lasts until 25 days after a stock starts trading. Road show: A tour taken by a company preparing for an IPO, in order to attract interest in the deal. Attended -- by invitation only -- by institutional investors, analysts and money managers. Spread: The difference between the proceeds an issuer receives and the price paid by the public for the issue. Waiting period: The time between the date on which the registration statement is filed and the date on which the shares can first be offered to the public. Source: CBS Marketwatch