A
stock option from an employer
gives the employee the right to buy a specific number
of shares in the company at a fixed price for a certain
number of years. Employee stock options come in two
basic forms:
Non-qualified
stock option- This option can be granted at
a discount of the stock's market value. If the employer
permits, the stock is transferable to the employee’s
children or a charity.
Incentive
stock option (ISO)- This option qualifies for
special tax treatment. For example, gains may be taxed
at the capital gains rate instead of at the higher,
ordinary income tax rates.
Most stock options provided by the
employer are for a certain period. If the employee
does not exercise his/her stock option within that
period, then it will lapse automatically. If the employee
is leaving the company, he/she can only exercise vested
options. All future vesting will be lost with the
ending of the employment.
Generally, stock options promise
potential cash or stock in addition to salary. Both
privately and publicly held companies make options
available for several reasons:
 |
As an incentive
to attract and keep good workers. They want their
employees to feel like owners or partners in the
business. |
|
They want to hire skilled workers
by offering compensation that goes beyond a salary.
This is especially true in start-up companies
that want to hold on to as much cash as possible. |
