Employee Stock Option - ESO.
What is an 'Employee Stock Option - ESO'
An employee stock option (ESO) is a stock option granted to specified employees of a company. ESOs offer the options holder the right to buy a certain amount of company shares at a predetermined price for a specific period of time. An employee stock option is slightly different from an exchange-traded option, because it is not traded between investors on an exchange.
BREAKING DOWN 'Employee Stock Option - ESO'
How a Stock Option Agreement Works.
Assume that a manager is granted stock options, and the option agreement allows the manager to purchase 1,000 shares of company stock at a strike price, or exercise price, of $50 per share. 500 shares of the total vest after two years, and the remaining 500 shares vest at the end of three years. Vesting refers to the employee gaining ownership over the options, and vesting motivates the worker to stay with the firm until the options vest.
Examples of Stock Option Exercising.
Using the same example, assume that the stock price increases to $70 after two years, which is above the exercise price for the stock options. The manager can exercise by purchasing the 500 shares that are vested at $50, and selling those shares at the market price of $70. The transaction generates a $20 per share gain, or $10,000 in total. The firm retains an experienced manager for two additional years, and the employee profits from the stock option exercise. If, instead, the stock price is not above the $50 exercise price, the manager does not exercise the stock options. Since the employee owns the options for 500 shares after two years, the manager may be able to leave the firm and retain the stock options until the options expire. This arrangement gives the manager the opportunity to profit from a stock price increase down the road.
Factoring in Company Expenses.
ESOs are often granted without any cash outlay requirement from the employee. If the exercise price is $50 per share and the market price is $70, for example, the company may simply pay the employee the difference between the two prices multiplied by the number of stock option shares. If 500 shares are vested, the amount paid to the employee is ($20 X 500 shares), or $10,000. This eliminates that need for the worker to purchase the shares before the stock is sold, and this structure makes the options more valuable. ESOs are an expense to the employer, and the cost of issuing the stock options is posted to the company's income statement.
How do stock options work?
Job ads in the classifieds mention stock options more and more frequently. Companies are offering this benefit not just to top-paid executives but also to rank-and-file employees. What are stock options? Why are companies offering them? Are employees guaranteed a profit just because they have stock options? The answers to these questions will give you a much better idea about this increasingly popular movement.
Let's start with a simple definition of stock options:
Stock options from your employer give you the right to buy a specific number of shares of your company's stock during a time and at a price that your employer specifies.
Both privately and publicly held companies make options available for several reasons:
They want to attract and keep good workers. They want their employees to feel like owners or partners in the business. They want to hire skilled workers by offering compensation that goes beyond a salary. This is especially true in start-up companies that want to hold on to as much cash as possible.
Go to the next page to learn why stock options are beneficial and how they are offered to employees.
More to Explore.
Related Content.
Recommended.
Get the best of HowStuffWorks by . Keep up to date on:
What Happens to My Stock Options After I Leave a Company?
Leaving a company creates several difficulties, most involving company benefits. You now need to find a new health plan, a new retirement plan and deal with any type of stock benefits you may have received. Some plans are fairly universal and allow you to roll over accounts when you switch to a different business. Other benefits, like stock options, are more difficult to move and are governed by company rules when you choose to leave a business.
Definition.
Stock options are a type of benefit that allows you, as an employee, to buy company stock at a certain price. Of course, this option is rarely useful if you have to pay as much for the stock as other investors (unless company stock is very hard to find for sale), so companies typically offer stock discounts to employees. The employee can choose to use the stock option and buy stock or he can do nothing.
Companies add stock options to their benefits to help attract employees who think the business will do well over time. Stock options do not cost the company much to offer--they may have to accept a lower funding amount from stock sales to employees, and there are some management fees involved, but that is all. This makes stock options easy for companies to offer, even when employees are fired or suddenly leave a company.
Vesting Period.
When an employee leaves a company is very important with regard to stock options. A vesting period is the time you must work for the company before the stock options become exercisable, i. e., before you can use them. Most vesting periods are a few years long. If you leave the company before this vesting period has completed, then you cannot use stock options and they are absorbed back into the company.
Time Limits.
If your options have been vested and you are still leaving, then companies typically create a time limit for you to use those options after you no longer work for the company. Typically, you have between three and six months before you lose the options, which again costs the company no money since they were essentially offering a discount on the shares to begin with.
Competitor Rules.
Most companies also have strict rules about competitors. If you leave a company and start to work for one of their competitors, your options will most likely be revoked immediately, so use them before you start working again.
Fast Answers.
Many companies use employee stock options plans to compensate, retain, and attract employees. These plans are contracts between a company and its employees that give employees the right to buy a specific number of the company’s shares at a fixed price within a certain period of time. The fixed price is often called the grant or exercise price. Employees who are granted stock options hope to profit by exercising their options to buy shares at the exercise price when the shares are trading at a price that is higher than the exercise price.
Companies sometimes revalue the price at which the options can be exercised. This may happen, for example, when a company’s stock price has fallen below the original exercise price. Companies revalue the exercise price as a way to retain their employees.
If a dispute arises about whether an employee is entitled to a stock option, the SEC will not intervene. State law, not federal law, covers such disputes.
Unless the offering qualifies for an exemption, companies generally use Form S-8 to register the securities being offered under the plan. On the SEC’s EDGAR database, you can find a company’s Form S-8, describing the plan or how you can obtain information about the plan.
Employee stock options plans should not be confused with the term "ESOPs," or employee stock ownership plans, which are retirement plans.
Комментарии
Отправить комментарий