Stock Options, basics explained

Leading in from [ Do ESOPs really work? ]


What is Stock Based compensation?


Is there more than 1 way to provide Stock based compensation?

Yes. There are.


Employee Stock Option Plan (ESOP), Incentive Stock Options (ISO), Employee Stock Purchase Plans (ESPP), Non-Qualified Stock Options (NQSO/ NSO)

Allows employees to become share holders at a future date and at a pre-determined price, usually lower than the fair market price.


Restricted Stock Units (RSU), Unrestricted Stock Unit (USU), Common Stock Alternative (CSE)

Allows employees to become share holders today but applies restrictions on the transfer-ability or ownership to safeguard company interests.


Phantom Stocks, Stock Appreciation Rights (SAR), Profit Pool, Strategic Deferred Compensation Plans, Profit Unit Plan (PUP)

Mimics equity interest but without altering or modifying the cap table to incentivize employees for current and future performance.


Some of the hot terms in stock options & what they mean


Act of issuing a stock option award to an employee which describes his entitlement and the terms of such entitlement, usually read with the employment agreement


The time period that an employee needs to wait for/ milestones which need to be reached/ performance that needs to be delivered when the employee can apply to receive the stock.

Few other vesting related terms:

Vesting schedule: Schedule of when what portion of stock becomes eligible for exercise

Accelerated vesting: Procedure for premature vesting in situations such as buy-out/ merger

Trigger vesting: Single/ Double Trigger of sale of business +/- employee exit that leads to vesting

Cliff vesting: Time period during which no vesting happens till a certain date


Act of buying the stock unit by paying the ‘Exercise amount’, if any, to convert the vested options to actual stock.


Price that the option holder pays in order to acquire the stock units which he is entitled to which is usually at a highly discounted price.


Committed period that the employee needs to hold on to such ESOPs & be in employment to be eligible for the exercise of the stock options.


Period that the employee needs to hold shares received by him by exercise before he can sell/ otherwise transfer them.


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