stock option
A contract granting an employee the right to purchase company shares at a predetermined price (strike price) after a vesting period.
Example
“The engineer's stock options allowed her to buy 10,000 shares at $5 each — worth $100,000 when the stock hit $15.”
Memory Tip
STOCK OPTION = the right to buy company stock at yesterday's price. Valuable if the company grows.
Why It Matters
Stock options can be a significant part of employee compensation, especially at startups and tech companies, potentially creating substantial wealth if the company performs well. Understanding how they work helps employees evaluate their total compensation package and make informed decisions about accepting job offers or leaving companies.
Common Misconception
Many people believe that receiving stock options means they immediately own shares in the company. In reality, options are just the right to buy shares at a future date, and employees must wait through the vesting period and then actually purchase the shares at the strike price before they own anything.
In Practice
An employee joins a software company and receives 1000 stock options with a strike price of 10 dollars per share and a four-year vesting schedule. After two years, 500 options have vested, so the employee can buy 500 shares at 10 dollars each if they choose to. If the company stock is now trading at 25 dollars, the employee could purchase those 500 shares for 5000 dollars and immediately have shares worth 12500 dollars.
Etymology
STOCK (ownership shares) OPTION (right but not obligation to buy). The right to buy STOCK at a set price.
Common Misspellings
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See Also
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