Define: Stock Option

A stock option is a financial contract that gives an individual the right, but not the obligation, to buy or sell a specific number of shares of a company’s stock at a predetermined price within a certain time period.

Stock options are typically granted to employees as part of their compensation package. The options have an exercise price, which is the price at which the employee can purchase the company’s stock. The employee can exercise the option by buying the stock at the exercise price and then sell it at the market price to make a profit.

Yes, stock options are generally subject to taxation. When an employee exercises their stock options, the difference between the exercise price and the fair market value of the stock is considered taxable income. The employee will need to report this income on their tax return.

In most cases, stock options cannot be transferred or sold to another person. They are typically only exercisable by the employee to whom they were granted. However, some companies may allow employees to transfer their options to immediate family members or in certain other limited circumstances.

The treatment of stock options upon leaving a company depends on the specific terms of the option agreement. In some cases, options may expire immediately upon termination, while in others, there may be a certain period of time during which the employee can exercise their options. It is important to review the option agreement and consult with a legal professional to understand the specific terms.

In most cases, stock options cannot be exercised before they vest. Vesting is a process by which an employee becomes entitled to exercise their options over a period of time. Once the options have vested, the employee can exercise them and purchase the company’s stock.

If the company’s stock price drops below the exercise price of the stock options, it may not be financially beneficial for the employee to exercise the options. In such cases, the employee may choose not to exercise the options and let them expire.

In some cases, stock options can be used as collateral for a loan. However, this depends on the terms of the loan agreement and the policies of the lender. It is advisable to consult with a financial advisor or legal professional before using stock options as collateral.

The treatment of stock options upon an employee’s death depends on the specific terms of the option agreement and the company’s policies. Some companies may allow the options to be exercised by the employee’s estate or beneficiaries, while others may have different provisions. It is important to review the option agreement and consult with a legal professional to understand the specific terms.

Yes, a company may have the right to cancel or forfeit stock options under certain circumstances. This could occur if an employee violates certain terms of their employment agreement, such as engaging in competition with the company or disclosing confidential information. It is important to review the option agreement and consult with a legal professional to understand the specific provisions regarding cancellation or forfeiture.