Employee Stock Options (ESOs)
Description
Employee stock options are an incentive offered by companies to their employees in the form of equity compensation. These options give employees the right to purchase a certain number of company shares at a fixed price, known as the "strike price," within a specified time period. The strike price is usually set at or above the current market price of the company's shares at the time the options are granted, with the intention of encouraging employees to work to increase the company's value.
Employee stock options typically have a vesting period, during which the employee must remain with the company in order to exercise the options. Once the options have vested, the employee has the right to purchase the shares at the strike price, even if the current market price is higher. If the employee chooses to exercise the options and purchase the shares, they can either hold onto the shares or sell them on the open market.
Employee stock options can be a valuable form of compensation for employees, as they give them a stake in the company's success and allow them to benefit financially from any increase in the company's value. For companies, offering employee stock options can be a way to attract and retain talented employees, as well as align employee incentives with company goals.
Frequently Asked Questions
Employee stock options are typically taxed as ordinary income at the time they are exercised, based on the difference between the strike price and the current market price of the shares. However, there are some tax advantages to holding onto the shares for a certain period of time before selling them.
Yes, if the market price of the company's shares falls below the strike price of the options, employees may choose not to exercise their options, as it would be cheaper to purchase the shares on the open market. In this case, the employee would not benefit financially from the options.
No, not all companies offer employee stock options. This is typically more common in publicly-traded companies and startups.
Google offers employee stock options as part of its compensation package for employees.
Atlassian, an Australian software company, offers employee stock options as a way to attract and retain talent.
Amazon offers a program called the "Career Choice" program, which includes employee stock options as a benefit for employees.
Further Reading Materials
"Employee Stock Options: What You Need to Know" by Investopedia
"Employee Stock Options: Understanding the Basics" by the National Center for Employee Ownership
"Employee Stock Options Explained" by The Balance
