Stock Options
Description
Stock options are a common form of equity compensation that companies use to incentivize and retain employees. Stock options give employees the right, but not the obligation, to buy a specified number of shares of their company's stock at a predetermined price, known as the exercise price or strike price, within a certain time frame, typically several years. If the company's stock price rises above the exercise price, employees can purchase the shares at the lower price and sell them at the current market price, realizing a profit.
Stock options are often granted to key employees, such as executives and managers, as well as early employees of startups. The hope is that by giving employees a stake in the company's success, they will be more motivated to work hard and help the company grow.
However, stock options come with some risks. If the company's stock price falls below the exercise price, employees may end up holding onto stock that is worth less than they paid for it. Additionally, employees may face tax consequences when they exercise their options and sell their stock.
Frequently Asked Questions
Stock options give employees the right to buy company stock at a predetermined price within a specified time frame. If the company's stock price rises above the exercise price, employees can purchase the shares at the lower price and sell them at the current market price, realizing a profit.
Stock options are often granted to key employees, such as executives and managers, as well as early employees of startups.
If the company's stock price falls below the exercise price, employees may end up holding onto stock that is worth less than they paid for it. Additionally, employees may face tax consequences when they exercise their options and sell their stock.
John, a software engineer, was granted 1,000 stock options as part of his compensation package at a startup. The exercise price was $5 per share, and he had five years to exercise his options. Three years later, the company went public, and the stock was trading at $20 per share. John decided to exercise his options and sell his shares, realizing a profit of $15 per share.
Sarah, a marketing manager, was granted 500 stock options at a mature company. The exercise price was $50 per share, and she had ten years to exercise her options. However, the company's stock price declined over the years, and when Sarah exercised her options, the stock was only worth $30 per share. She decided to hold onto the shares, hoping the price would recover in the future.
Further Reading Materials
"Understanding Employee Stock Options." The Balance.
"The Pros and Cons of Offering Employee Stock Options." Forbes.
"What You Need to Know About Stock Options." Harvard Business Review.
