Employee stock option

These options are similar to other options with some differences

1.) The exercise price is typically set at the company's stock price on the day of the option grant. Regulators in 2006 found that many companies back dated options to a previous market low, so that holders received an instant gain. They also found that options are frequently issued just before the public announcement of good news, that was expected to cause a stock price increase. Some companies set the exercise price to be slightly higher than the current stock price, partially to deter criticism that option grants are too expensive a price for the stockholders to pay.

2.) The vesting schedule specifying when these options may first be exercised. They typically specify a holding period of three to ten years, or a schedule of progressively more becoming vested. This is longer than the typical 2 years of exchange-traded options. Thus employee stock options are similar to warrants.

Options only continue to vest so long as the employee is an employee. Stock options are sometimes jokingly referred to as "golden handcuffs" (in the same vein as golden handshakes or golden hellos). The employees may feel compelled to work out the time until they are able to liquidate the stock even if they might otherwise prefer to leave the company. This is especially the case in a strongly rising market. During the dot-com boom, many employees' compensation consisted largely of stock options; there are cases in which secretaries and janitors became multi-millionaires after their companies went public.

For companies that are not publicly traded, the options are typically not exercisable (and therefore worth nothing) until the company is either acquired or goes public with an IPO.

3.) Employee stock options are not transferable. They cannot be sold to any other party. The one typical exception is that in the event of the death of the employee, the spouse inherits all the vested options. Theoretically, to realize their value, they must be exercised and sold. Because the exercise will trigger a taxable event, holders with access to high level financial products can freeze the options' value with derivative products. In practice top mangement who want to leave their job for a better offer can negotiate compensation from the new business for the options they leave behind.

4.) The options expire at a pre-determined date. This is to force their eventual exercise.

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