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What is a Stock Option Agreement? A stock option agreement refers to a contract between a company and an employee, independent contractor, or a consultant. Employers use it as a form of employee compensation. Both parties submit to operate within the terms, conditions, and restrictions stipulated in the agreement.
Stock options are a form of compensation. Companies can grant them to employees, contractors, consultants and investors. These options, which are contracts, give an employee the right to buy, or exercise, a set number of shares of the company stock at a preset price, also known as the grant price.
Basics of Option Profitability A call option buyer stands to make a profit if the underlying asset, let's say a stock, rises above the strike price before expiry. A put option buyer makes a profit if the price falls below the strike price before the expiration.
Vesting that means the point in time where shares are earned or gained by some person. Employers typically draft share vesting agreements to align the employee's interest to that of the company. They are also used to ensure that key executives and talented employees can be attracted and retained.
Time-based stock vesting is when you earn options or shares over a specified period of time. Most time-based vesting schedules have a vesting cliff. Cliff vesting is when the first portion of your option grant vests on a specific date and the remaining options gradually vest each month or quarter afterward.
A stock option (also known as an equity option), gives an investor the right, but not the obligation, to buy or sell a stock at an agreed-upon price and date.
If you are buying stock from an option, you buy it at the option price, regardless of what the current price of the stock is. So if you are an employee with an option to buy 12,000 shares of stock at $1 a share, you will need to pay $12,000. At that point, you would own the shares outright.
Key Points: A common rule of thumb is to sell restricted stock units when they vest because there is no tax benefit to holding the stock any longer.
Companies usually tie earning equity to tenure (a process called vesting). In most cases, you have to stay for at least a year to vest any equity (your grant may call this a ?one-year cliff?). When you leave, you are only entitled to the portion of that equity that has vested as of the date of your departure.
In short, a stock option gives you the right to buy company shares at a pre-set price that's hopefully lower than the current share price. In this article, we'll talk about what employer stock options are, how they work, and how to calculate what your stock options might be worth.