Learn what an employee stock option is, how vesting and exercise work, and why stock-option value depends on price, timing, and tax treatment.
An employee stock option is a form of compensation that gives an employee the right to buy company shares later at a predetermined exercise price. If the stock price rises above that exercise price before the option expires, the option can have meaningful value.
Employee stock options usually vest over time, which means the employee earns the right to exercise them gradually rather than immediately. Their economic value depends on several moving parts: the exercise price, the current stock price, the remaining time before expiration, and the tax treatment of the option type.
This matters because employee stock options can change total compensation dramatically. They can reward employees when the company grows, but they also concentrate personal risk in a single employer and can end up worthless if the stock never rises above the exercise price.