Exercising Employee Stock Options

An employee stock option is a contract between the employer and employee to purchase the common shares of the company at a pre-defined and agreed-upon rate within a particular time period. Here, the employee gets the stock options as part of his compensation plan in the company. It serves both as an incentive to join the company upon job application and as a reward given to valuable employees.

When an employee exercises their stock options, they have the opportunity to buy shares of stock at a predetermined price known as the strike price. One significant advantage of engaging in a stock options agreement is that it allows employees to acquire shares at a lower cost than the fair market value (FMV) of the shares at the time of exercising the option. This contrasts with purchasing company shares at their current market price on an open market exchange. The option is deemed exercised when the employee opts to purchase the shares from the company, thereby becoming an official shareholder.

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