ch16 Flashcards
What is an employee stock option?
An employee stock option is a type of compensation that gives employees the right to buy company stock at a predetermined price, known as the strike price, for a set period of time.
What are the two types of employee stock options?
The two types of employee stock options are non-qualified stock options (NQSOs) and incentive stock options (ISOs), each with different tax implications for the employee and the company.
How are employee stock options valued?
Employee stock options are valued using various models, including the Black-Scholes-Merton model, and take into account factors such as the underlying stock price, strike price, time to expiration, risk-free interest rate, and volatility.
What is the vesting period?
The vesting period is the length of time that an employee must work for a company before they are able to exercise their stock options, and is typically used as a way to incentivize employee retention.
What is the exercise price?
The exercise price, also known as the strike price, is the price at which an employee is able to buy company stock through their stock options.
What is the expiration date?
The expiration date is the date on which an employee’s stock options expire and can no longer be exercised.
What are the tax implications of employee stock options?
The tax implications of employee stock options vary depending on the type of option and the holding period, but generally involve paying taxes on the difference between the exercise price and the market price of the stock at the time of exercise.
What is the risk to the employee with employee stock options?
The risk to the employee with employee stock options is that the stock price may fall below the exercise price, making the options worthless, or that the employee may be unable to exercise the options due to financial constraints or other factors.
What is the risk to the company with employee stock options?
The risk to the company with employee stock options is that the options may become too valuable and incentivize employees to leave, or that the options may dilute the value of existing stockholders’ shares.
What are some alternative forms of employee compensation?
Some alternative forms of employee compensation include restricted stock units (RSUs), performance-based stock options, and cash bonuses, each with their own advantages and disadvantages for both the employee and the company.
