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Remember: If you hope to purchase and sell your stock someday, accepting your stock option grant is the first step you have to take.It doesn't cost anything to accept the grant, and you're not obligated to actually exercise your options.
A. The Key Documents Stock Option Plan. This is the overarching general plan that is adopted by the startup regarding issuances of stock options. ... Stock Option Agreement. ... Exercise Agreement. ... Dates. ... Number and Type of Shares. ... Exercise Price. ... Type of Option. ... Vesting Schedule.
When an employee exercises stock options, you'll credit Common Stock for the number of shares x par value, debit Cash for the number of shares x the exercise price, then debit Additional Paid-In Capital for the difference, representing the increase in value of the shares during the service period.
Exercising stock options means you're purchasing shares of a company's stock at a set price. If you decide to exercise your stock options, you'll own a piece of the company. Owning stock options is not the same as owning shares outright.
Stock options are also compensation expense to the company. This expense is recognized as the employee earns service time up to the vesting date. The appropriate debit is made to compensation expense each accounting period with a credit to additional paid-in capital.
The use of employee stock options effectively involves two types of transactions: the payment of compensation in the form of employee stock options (reflected on the income statement) and, when the options are exercised, a financing transaction (reflected on the balance sheet).
For example, you may be granted the right to buy 1,000 shares, with the options vesting 25% per year over four years with a term of 10 years. So 25% of the ESOs, conferring the right to buy 250 shares would vest in one year from the option grant date, another 25% would vest two years from the grant date, and so on.
Stock option expensing is a method of accounting for the value of share options, distributed as incentives to employees within the profit and loss reporting of a listed business.