What Are Employee Stock Options?



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Employees of a certain status in an organization can get the advantage of stock options. A stock option is the right to buy shares of a specified limit in the company. This is not an obligation for the employees, but if they are willing to do so, they are granted the right to go ahead with the plan.

Most companies use these stock options to motivate, retain and attract employees to commit to their organizations. The option is simply a plan or contract between the employees and the company, allowing the former to buy the shares of the company at prices that are fixed.

Although the options are given to employees at fair deals, the shares do not have a real value in the market because they are not transferrable from one person to the other. Once one buys them, they cannot trade in the secondary market. It is worth noting that the value of the stocks is usually a theoretical, and is derived using the Black-Scholes approach. This is one of the widely accepted methods of valuating the stocks offered. The assumption is that the stocks do not earn dividends for the employees.

When the company pays them, the Black Scholes method is used to inculcate the value into the pricing of the shares.

Many companies use trusts as a way of encouraging employees to buy the employee stock options. Forming trusts is a way of guaranteeing financial ability for the trust to secure the stocks. In case financial reasons are limiting, soft loans can be given to the trusts.