A stock option agreement is a contract between a company and an employee that gives the employee the right to purchase a specific number of shares of the company’s stock at a predetermined price. This predetermined price is known as the exercise price or strike price.
Stock options are often used as a form of employee compensation, as they provide a way for employees to share in the company’s success and growth. They are also used as a way to attract and retain top talent.
An employee who receives a stock option agreement is typically given a certain amount of time to exercise the option, or purchase the stock at the predetermined price. Once the option is exercised, the employee becomes a shareholder and can sell the stock for a profit if the value of the stock has increased since the exercise price was set.
It’s important to note that stock options come with some risks. The value of the stock can go down, and if the employee doesn’t exercise the option before it expires, they lose the opportunity to purchase the stock at the predetermined price.
There are two types of stock options: incentive stock options (ISOs) and non-qualified stock options (NQSOs). ISOs have certain tax benefits, but they are subject to specific rules and restrictions. NQSOs do not have the same tax benefits as ISOs, but they are more flexible in terms of how they can be awarded and exercised.
In order to effectively navigate the world of stock option agreements, it’s important to consult with a financial advisor or tax professional. They can help you understand the tax implications of exercising stock options, as well as the potential risks and rewards.
In summary, a stock option agreement is a contract between a company and an employee that gives the employee the right to purchase a specific number of shares of the company’s stock at a predetermined price. While stock options can be a valuable form of employee compensation, they also come with risks and should be carefully considered before being exercised.