Employee Stock Option

by Investing School on November 24, 2010

An employee stock option gives an employee of a company the opportunity to purchase shares in the company at a predetermined price. The employee is under no obligation to purchase the stock but the option is there if the employee chooses to exercise it.

An employee stock option should not be confused with a regular exchange-traded option. It is not usually traded on an exchange and you will not find a put element to it. In addition, employees are obligated to wait for a specified amount of time before they are allowed to purchase any stock.

Companies also use these options as a form of non-cash compensation. There are usually restrictions on the option such as vesting and limited transferability which make it more likely that the employee will have an incentive to help increase the company’s stock value.
Most employee stock options are offered to those that are part of management and it is included in their executive compensation package. You will also find it offered to regular employees by companies that are startups and want to offer more in terms of compensation to their staff.

You will find that employee stock options may be offered to others that are not necessarily considered employees. They can be offered to suppliers, consultants, lawyers and promoters because they are affiliated with the company. Employee stock options are also similar to warrants. These are call options that are issued by a company in relation to their own stock.

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