The options do not promote a selfish short-term perspective on the part of entrepreneurs. Options are the best compensation mechanism we have to get managers to act in ways that ensure the long-term success of their companies and the well-being of their workers and shareholders. Stock options are a form of compensation. Companies can grant them to employees, contractors, consultants and investors.
These options, which are contracts, give the employee the right to purchase, or exercise, a certain number of shares in the company at a pre-established price, also known as the grant price. However, this offer doesn't last forever. You have a set amount of time to exercise your options before they expire. Your employer may also require you to exercise your options within a period of time after you leave the company.
You don't have to offer stock options to all employees, and many companies choose to offer stock options only for a few key positions. S, Options Clearing Corporation acts as the clearinghouse for options contracts and ensures compliance with them. Backdating options has become much more difficult since the introduction of Sarbanes-Oxley, as companies are now required to report option grants to the SEC within two business days. These options come in the form of regular call options and give the employee the right to purchase the company's shares at a specified price for a limited period of time.
Second, employees tend to reduce their risk by exercising grandfathered stock options much earlier than a well-diversified investor would, thus reducing the potential for a much greater profit if they had held the options until maturity. The main disadvantage of stock option plans for the company is the possible dilution of the capital of other shareholders when employees exercise stock options. Many ESOs are granted with a 10-year term, but there are virtually no options that are traded during that time period. A company needs to address a number of key issues before adopting a stock option plan and issuing options.
Some investment banks will even quote prices for executives looking to hedge or sell their stock options before acquiring rights, if your company's options plan allows it. The options agreement will provide the key details of your option grant, such as the award schedule, how ESOs will be transferred, the shares represented by the grant, and the strike price. However, senior executives with the largest option holdings are unlikely to exercise early and destroy the value of the option when the stock price has risen substantially.
