Legal Definitions - employee stock option

An employee stock option is a contractual right granted by a company to its employees to purchase a specific number of shares of the company's stock at a predetermined price (known as the "strike price" or "exercise price") within a specified period. This right is typically offered as a form of compensation or incentive, allowing employees to potentially profit if the company's stock price rises above the strike price. Employee stock options usually come with a "vesting schedule," meaning the employee must work for the company for a certain period before they can exercise their options.

• Example 1: Attracting Talent to a Startup

  A burgeoning tech startup, "Quantum Leap Innovations," is looking to hire a highly sought-after software engineer, Alex, but cannot yet match the high cash salaries offered by established tech giants. To entice Alex, Quantum Leap offers a competitive base salary augmented by a grant of 20,000 employee stock options, with a strike price of $2.00 per share, vesting over four years. This arrangement provides Alex with a significant financial incentive to join the startup, as he stands to gain substantially if the company succeeds and its stock value increases.

• Example 2: Performance Incentive in an Established Company

  "Global Manufacturing Co.," a large, publicly traded corporation, wants to motivate its senior leadership team to achieve ambitious five-year growth targets. The company awards its Chief Operating Officer, Maria, and other executives employee stock options with a strike price set at the current market value of $75.00 per share. These options are structured to vest only if the company meets specific revenue and profitability milestones over the next five years, directly linking Maria's potential financial reward to the company's overall performance and success.

• Example 3: Exercising Options After Company Growth

  Five years ago, David joined "MediCare Solutions Inc." and received employee stock options with a strike price of $15.00 per share, vesting annually over four years. The company has experienced significant expansion and innovation, and its stock is now trading at $60.00 per share. Since all of David's options are fully vested, he decides to exercise them. This means he purchases the shares from MediCare Solutions Inc. at his original strike price of $15.00 per share. He can then sell these shares on the open market for $60.00 per share, realizing a substantial profit of $45.00 per share (before taxes and transaction costs), illustrating the financial benefit an employee can gain from their stock options.