Stock options are financial instruments that give the receiver a right, but not an obligation, to buy or sell stock at a certain price.
Stock options are financial instruments that give the receiver a right, but not an obligation, to buy or sell stock at a certain price. These stock option prices are often set at a lower than market value, to attract interest investors or offer incentives to work harder in the company. Once these options are exercised, the party may buy or sell the stock in the company.
The basic components of a stock options are:
- Option type-The type of option, either a call (buy) or put (sell) option.
- Strike Price– The set price for buying or selling the asset (shares)
- Expiration date– The date on which the rights to exercise the options expires.
- Vesting period– If applicable, the time period which the stock options rights are available.
- Option premium– The cost associated with buying or selling the option.
A simple example of a stock option would be a call option for an employee to purchase 100 shares of a company at a strike price of $2. When the market value of the shares is over $2 (either on a stock exchange for public companies, or through valuation reports for private companies), it would be beneficial for the employee to exercise their options. When the share price reaches $3, the employee can then exercise their options for $200, and then sell their shares for $300, making a $100 profit.
If you are still not sure regarding what options are and want to know more, Eqvista can help you. Eqvista also offers a FREE cap table application that can keep you on top of all dealings and up to date.