Stock Options: Definitions, types, eligibility criteria and how they work

What is a stock option?

Companies offer certain benefits to employees to boost their performance. One of these benefits is providing equity compensation. When a company provides stock options to its employees, it gives them an ownership stake and makes them a part of the company’s growth and success. This encourages employees to give their best, as they see the organization’s success as their own, with an opportunity to gain monetary benefit.

Stock options are often offered by start-ups and financially strong companies like Infosys and Wipro. The employees have to fulfil certain eligibility criteria set by the company to avail this perk.

In stock options, the employee can purchase shares of the company at a certain price within a specified period. The employees have to work with the company for a specified period to be eligible.

Eligibility criteria for stock options

In the case of ISOs, only permanent employees are eligible for the stock options.

For NSOs, permanent employees, non-independent directors, and contract-based workers are eligible.

How it works

Here's how stock options work

• Granting of options The company grants employees stock options, and they can buy the company’s shares at a predetermined price.

• Vesting period Employees can avail themselves of stock options when they remain with the company for a specific period. After the set period, employees are eligible to exercise their stock options.

• Exercise price Exercise price is a predetermined price at which employees buy stock options when they are eligible for stock options.

• Expiration date Stock options have an expiration date, the employees have to exercise their stock options before the expiration date.

• Profit The reason stock options are provided is so that employees can participate in the growth of the company. When the share price of the company increases, the value of the stock options also increases. When the share price is above the exercise price, the employee can sell the shares and book a profit.