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What Is an Employee Stock Option?

Some companies offer employees special stock options depending upon employee performance.
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  • Written By: Harriette Halepis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 19 November 2014
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Employee stock options are offered to employees of certain companies on a contractual basis. Generally, these stocks are issued privately between an employee and employer, which is why they are considered part of an employee contract. Employee stocks can come in the form of vested or non-vested stock options, though there are usually certain conditions included in the purchase of employee stocks.

Most of the time, an employee stock option cannot be sold right away, but must be held onto for a determined amount of time. In addition, employee stocks are usually non-transferable. These are the two major differences between an employee stock option and a regular stock purchase.

Many companies also offer employees more stock options depending upon employee dedication and performance. Those employees that are considered more valuable to a company will often be offered numerous stock options. An employee stock option tends to include a certain strike price that is set by the company at hand.

This strike price allows an employee to exercise his or her stock options once a stock has reached a certain price. This gives an employee of a company greater advantage over other stock holders. The strike price tends to fluctuate from company to company, though it is generally based upon the value of the stock at the time of the initial stock offering.

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Employee stock options are offered by well-established companies and newer companies alike. Newer companies will often offer employees stock options in lieu of a higher salary, and companies that have been in business for awhile tend to offer stock options to employees that they wish to retain.

Unlike traditional stocks, employee stocks usually come with a longer duration period. Most employee stocks can be extended up to ten years, while regular stocks often have an expiry date of thirty months. In regards to taxation issues, most employees stock options must be taxed, though this is often determined by the stock contract, and by the country in which the stock is issued.

An employee stock option is not to be confused with employee stock ownership. An employee stock ownership plan is comparable to a form of retirement, and it does not follow the same legal format. Though the two terms are often used interchangeably, they are not the same. Some states and countries may have laws that prevent employees from accepting certain stock options, though offering employee stocks is commonplace in most ares of the world.

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