What Does It Mean to Exercise Stock Options?

You receive a stock option as part of your compensation package as a new employee at your company. How do options and stocks differ? Cam Merritt is a writer and editor specializing in business, personal finance and home design. When you exercise your options and purchase your shares at a fair market value higher than the grant price, but do not immediately sell your shares, you will likely be required to pay a federal AMT, and possibly a state AMT. Time value depends on the amount of time remaining until expiration the date when the ESOs expire and several other variables. Thanks for using UpCounsel! Because it gives the employee an incentive to perform well and stay with the company.

Mar 13,  · On the other hand, if you have incentive stock options, there are more possibilities. If you exercise the option and sell the stock in the same year, you'll pay regular income tax rates just like with the incentive stock options, but no payroll taxes.

Types of Stock Options

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In and Out of The Money

Note that the stock may not be fully vested in certain cases, despite exercise of the stock options, as the company may not want to run the risk of employees making a quick gain (by exercising their options and immediately selling their shares) and subsequently leaving the company. What Does It Mean to Exercise a Stock Option? Exercising a stock option means purchasing the shares of stock per the stock option agreement. The benefit of the option to the option holder comes when the grant price is lower than the market value of the stock at the time the option is exercised. Vesting essentially means, in the case of restricted stock, the lapse of the risk of forfeiture on such share ownership, or, in the case of stock options, earning the right to exercise the option. In the case of restricted stock, the term comes into play when the shares are subject to a risk of forfeiture.


Stock options "vest" according to a vesting schedule, and companies can set the schedules to reflect the kind of incentive they're trying to give. For example, a company could give you options on 6, shares that vest all at once in five years, which would be designed to keep you around for the long haul. An employee stock option is basically the same as a vesting option. The only difference is that an employee stock option is just that, an option. It does not create an obligation on the behalf of the employee, he does not have to purchase the stocks in the future. Vesting should not be confused with time to exercise. Most companies require you to exercise your shares within 90 days of your departure (we covered the downside of this term in When Success & Stock Options Make It Expensive to Leave) and years from .

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