Objectives[ edit ] Many companies use employee stock options plans to retain, reward, and attract employees,  the objective being to give employees an incentive to behave in ways that will boost the company's stock price. The employee could exercise the option, pay the exercise price and would be issued with ordinary shares in the company. As a result, the employee would experience a direct financial benefit of the difference between the market and the exercise prices. Stock options are also used as golden handcuffs if their value has increased drastically. An employee leaving the company would also effectively be leaving behind a large amount of potential cash, subject to restrictions as defined by the company.
Employee stock options March 24, AM ET An employee stock option is the right given to you by your employer to buy "exercise" a certain number of shares of company stock at a pre-set price the "grant," "strike" or "exercise" price over a certain period of time the "exercise period". Most options are granted on publicly traded stock, but it is possible for privately held companies to design similar plans using their own pricing methods.
Stock options are a type of alternative compensation that some companies, including many startups, offer as part of their package for employees. Employees come on board at perhaps a lower-than-normal salary in exchange for the possibility of a big payday later on. Talk to a financial advisor if you have questions about your stock options or any other investments.
Usually the strike price is equal to the stock's market value at the time the option is granted but not always. It can be lower or higher than that, depending on the type of option.
In the case of private company options, the strike price is often based on the price of shares at the company's most recent funding round. Employees profit if they can sell their stock for more than they paid at exercise.
Most stock options have an exercise period of 10 years. This stock options program the maximum amount of time during which the shares may be purchased, or the option "exercised. With some option grants, all shares vest after just one year.
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This is known as staggered, or "phased," stock options program. Most options are fully vested after the third or fourth year, according to a recent survey by consultants Watson Wyatt Worldwide.
Whenever the stock's market value is greater than the option price, the option is said to be "in the money. It may sound like cheating, but it's perfectly legal.
Outside investors, however, generally frown upon the practice -- after all, they have no repricing opportunity when the value of their own shares drops.