How Stock Options Work
11 days ago
- #dilution
- #vesting
- #employee stock options
- Employee stock-option programs are authorized by a company's board of directors and allow awarding options to employees based on a percentage of outstanding shares.
- Options grant employees the right to buy company shares at a fixed 'strike price' (usually the market price at grant) for a set period, typically 10 years.
- Vesting usually starts after one year and completes in four years; unvested options are canceled if the employee leaves.
- Vested options can be 'exercised'—purchasing shares at the strike price—and the shares can be held or sold.
- The employee's gain is the difference between the strike price and the market price at exercise.
- Options are 'under water' if the strike price exceeds the market price and 'in the money' if the market price is higher.
- Exercising options leads to new share issuance, increasing market capitalization but diluting earnings per share for existing shareholders.
- To prevent dilution, companies must either increase earnings proportionally or repurchase shares from the market.