Most options are granted on publicly traded stock, but it is possible for privately held companies to design similar plans using their own pricing methods. Usually the strike price is equal to the stock's market value at the time the option is granted but not always.
It can be lower or higher than that, depending on the type of option. In the case of private company options, the strike price is often based on the price of shares at the company's most recent funding round. Employees profit if they can sell their stock for more than they paid at exercise.
Most stock options have an exercise period of 10 years. This is the maximum amount of time during which the shares may be purchased, or the option "exercised.
With some option grants, all shares vest after just one year. With most, however, some sort of graduated vesting scheme comes into play: This is known as staggered, or "phased," vesting. Most options are fully vested after the third or fourth year, according to a recent survey by consultants Watson Wyatt Worldwide. Whenever the stock's market value is greater than the option price, the option is said to be "in the money.
During times of stock market volatility, a company may reprice its options, allowing employees to exchange underwater options for ones that are in the money.
It may sound like cheating, but it's perfectly legal. Outside investors, however, generally frown upon the practice -- after all, they have no repricing opportunity when the value of their own shares drops. Getting a job Getting a job k s k s: Starting to invest k s: Early withdrawals and loans k s: Rollovers k s: Retirement distributions Taxes Taxes you owe Income tax penalties The Alternative Minimum Tax Tax audits Health insurance Choosing a plan Where to buy coverage Finding affordable coverage Employee stock options Employee stock options Employee stock option plans Exercising stock options.
Buying a car Buying a car Buying a car Determining your car budget Buying a new car Buying a used car Car insurance Car insurance policies. Starting to invest Starting to invest Stocks Investing in stocks Stock values Bonds Investing in bonds How to buy bonds Types of bonds Bond investing risks Mutual funds Investing in mutual funds How to pick mutual funds Stock funds Bond funds Asset allocation Asset allocation Hiring financial help Hiring financial help How to hire a financial planner.
Buying a home Buying a home Buying a home Buying a home Selling a home Selling a home Home insurance Homeowners insurance policies Picking a home insurance company Filing a home insurance claim. Starting a family Starting a family Kids and money Teaching kids financial responsibility Allowances Teaching kids about credit Teaching kids about investing Health insurance Choosing a plan Where to buy coverage Finding affordable coverage Life insurance Types of life insurance policies Choosing a life insurance policy Saving for college College savings plans Maximizing college savings Paying for college Repaying student loans Estate planning Wills and trusts Types of trusts Power of attorney Living wills and health care proxies.
Getting started Goals Setting financial goals. Banking Opening a bank account. Alternatives to traditional banks. Money market deposit accounts and CDs. Spending Making a budget. Debt Paying off debt. Credit reports and credit scores.
Taxes Taxes you owe. The Alternative Minimum Tax. Early withdrawals and loans. Health insurance Choosing a plan. Where to buy coverage. Employee stock options Employee stock options. Employee stock option plans. Buying a car Determining your car budget. Buying a used car. Car insurance Car insurance policies. Stocks Investing in stocks. Bonds Investing in bonds. Mutual funds Investing in mutual funds.
How to pick mutual funds. Asset allocation Asset allocation. Hiring financial help Hiring financial help. How to hire a financial planner. Buying a home Buying a home. Selling a home Selling a home. Home insurance Homeowners insurance policies. Picking a home insurance company. Filing a home insurance claim. Kids and money Teaching kids financial responsibility. Teaching kids about credit. Teaching kids about investing.
Life insurance Types of life insurance policies. Choosing a life insurance policy. Saving for college College savings plans. Estate planning Wills and trusts. Living wills and health care proxies. Retirement planning How much to save. Top bank announces 1. How to 5x Your Savings Interest.More...