Legal Definitions - employee stock option

Employee Stock Option

An employee stock option is a benefit given to employees by their company that allows them to purchase company stock at a discounted price. This benefit is usually offered as an incentive to retain employees and encourage them to work towards the company's success.

For example, let's say that John works for XYZ Corporation and is given an employee stock option. The option allows him to purchase 100 shares of XYZ stock at a price of $50 per share, even though the current market price is $75 per share. John decides to exercise his option and purchases the shares for $5,000. If the stock price increases to $100 per share, John can sell his shares for $10,000, making a profit of $5,000.

Another example is Sarah, who works for ABC Inc. and is given an employee stock option. The option allows her to purchase 50 shares of ABC stock at a price of $25 per share, even though the current market price is $30 per share. Sarah decides not to exercise her option and instead waits to see if the stock price will increase. If the stock price does increase, Sarah can exercise her option and purchase the shares at the discounted price, making a profit if she decides to sell the shares later.

These examples illustrate how an employee stock option works. The employee is given the option to purchase company stock at a discounted price, which can potentially lead to a profit if the stock price increases. This benefit is used by companies to incentivize employees to work towards the company's success and retain valuable talent.