Employee Stock Option

An employee stock option is a benefit granted by an employer giving an employee the right to purchase company stock at a fixed price (called the "strike price" or "exercise price") for a set period. Stock options typically vest over a period (often 4 years), meaning you may want to stay with the company to earn the right to exercise them. Once vested, you can exercise (buy stock at the strike price) or let the option expire. If the stock price exceeds the strike price, the option is "in the money" and has value; if the stock price is below the strike, the option is "out of the money." Stock options incentivize employee loyalty and align employee interests with company success. Tax treatment differs for incentive stock options (ISOs, which may qualify for favorable tax treatment) versus non-qualified stock options (NSOs, taxed as ordinary income).