Stock Option

A stock option is a right, but not an obligation, to purchase shares of stock in a corporation. Stock options are often offered to potential higher level employee candidates at a corporation in order to entice those candidates to accept an offer for employment at the corporation. The stock options vest after a certain period of time elapses following the employee’s hiring, which is referred to as the stock option vesting date. If and when the option is exercised by the option holder, that person pays a reduced price for the purchase of the shares in order to receive them. One common misunderstanding when employees receive stock options is that they do have to actually pay a price to exercise the options. In other words, stock options are not free. The options are typically issued pursuant to a formal stock option plan created by the corporation prior to the issuance of the options to any employees. Because the options are exactly that – options – they don’t have to be exercised if the option holder chooses not to do so. Stock options are also a way for a corporation to save money by paying less in employee salaries at the outset, particularly for higher level knowledge workers.