A Primer on Employee Stock Option Plans
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To compensate, retain and attract employees, many companies issue stock options.
With an employee stock option (ESO) plan, you are offered the right to buy a specific number of shares of company stock, at a specified price called the grant price, also known as the strike or exercise price, within a specified number of years.
This is not considered an official retirement plan like a 401(k) plan. Employees who are granted stock options hope to profit by exercising their options to buy shares at a price that is higher than the exercise price. Terms of ESOs will be fully spelled out in an employee stock options agreement.
The employee stock option plan should not be confused with an Employee Stock Ownership Plan (ESOP). The ESOP is a retirement plan in which the company contributes its stock (or money to buy its stock) to the plan for the benefit of the company’s employees.
The ESOP maintains an account for each employee participating in the plan. Shares of stock vest over time before an employee is entitled to them. With an ESOP, you never buy or hold the stock directly while still employed with the company. If an employee is terminated, retires, becomes disabled or dies, the plan will distribute the shares of stock in the employee’s account.
The options will have a vesting date and an expiration date. You cannot exercise your options before the vesting date or after the expiration date.