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The term employee stock option (ESO) refers to a type of equity compensation granted by companies to their employees and executives. Rather than granting shares of stock directly, the company gives derivative options on the stock instead.
Stock options are usually granted for a specific period (option term) and must be exercised within that period. A common option term is 10 years, after which, the option expires. While time-based vesting remains popular, companies are increasingly granting equity that vests upon meeting certain performance criteria.
Stock options give employees the right to purchase company stock at a specific price known as the strike price. Options are granted on a set vesting schedule. RSUs are a type of restricted stock that's granted to key employees based on a set vesting schedule or after they reach certain performance benchmarks.
Compensation may also be used as a reward for exceptional job performance. Examples of such plans include: bonuses, commissions, stock, profit sharing, gain sharing.
For example, a stock option is for 100 shares of the underlying stock. Assume a trader buys one call option contract on ABC stock with a strike price of $25. He pays $150 for the option. On the option's expiration date, ABC stock shares are selling for $35.
A stock option plan is a mechanism for affording selected employees and executives or managers of a company the opportunity to acquire stock in their company at a price determined at the time the options are granted and fixed for the term of the options.
From the employee's standpoint, a stock option grant is an opportunity to purchase stock in the company for which they work. Typically, the grant price is set as the market price at the time the grant is offered.
If the employee sells the shares within one year 15% tax is levied against the capital gains. If the employee sells the shares after one year they are considered long term assets and are not taxable.
Stock options are a form of compensation. Companies can grant them to employees, contractors, consultants and investors. These options, which are contracts, give an employee the right to buy, or exercise, a set number of shares of the company stock at a preset price, also known as the grant price.
An employee stock option is the right given to you by your employer to buy ("exercise") a certain number of shares of company stock at a pre-set price (the "grant," "strike" or "exercise" price) over a certain period of time (the "exercise period").