Stock Option Plan

A stock-option plan is a contract between a company and its employees which give employees the right to buy a specific number of shares of the company’s stock at a specified price (strike price) within a specified time period. These plans are used to incentivize the employees by offering the company stock at potentially lower than market prices without the employees having to pay for that option today. It also allows the employee to participate in the benefits (and potential risks) of their employing company’s financial successes.

In addition to regular salaries and wages, these plans can bolster the compensation package to help attract, retain and motivate employees. For the employee, these plans should be thought of as a form of possible future compensation. There is nothing to say that the company’s stock will be priced higher than the strike price of the option in the future. Also, in the case of stock options within non-public companies, there generally would need to be an event such as taking the company public or the company being purchased to create a benefit to the employee.

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