Employee Stock Options

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What is Employee Stock Options

Employee stock options are a type of equity compensation granted by a company to its employees. They give the employees the right to purchase a certain number of the company's shares at a predetermined price, known as the exercise price or strike price. The employees can then choose to exercise their options and purchase the shares at the strike price, or they can choose to let their options expire.

There are two main types of employee stock options:

Incentive stock options (ISOs): These are options that are granted to employees as a form of long-term incentive. They are usually only exercisable after a vesting period, which is the length of time that an employee must work for the company before they can exercise their options. ISOs are generally tax-advantaged for the employee, as the employee does not have to pay taxes on the difference between the strike price and the fair market value of the shares when they exercise their options.

Non-qualified stock options (NQSOs): These are options that are granted to employees as a form of short-term or mid-term incentive. They are generally exercisable immediately or after a short vesting period, and are taxed as ordinary income for the employee when they exercise their options.

Employee stock options can be an attractive form of compensation for employees, as they give the employees the opportunity to share in the success of the company, and to potentially profit from the appreciation of the company's stock. However, they also carry some risk, as the value of the options is dependent on the performance of the company's stock, and the options may expire worthless if the stock does not appreciate in value.

See Also