Employee Stock Option Q & A
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EMPLOYEE STOCK OPTIONS
1. What is a Stock Option?
A stock option is a right to buy a certain number of shares in the Company at a fixed price
for a certain number of years. The fixed price is called the “grant,” “exercise” or “strike”
price and is typically the market value of the stock at the time the option is granted.
2. Is having a stock option the same as owning shares in the Company?
No, stock options do not provide for immediate direct ownership, but rather provide the
opportunity to buy stock in the future at a discount.
3. Are there different types of stock options?
Yes, there are two main types of employee stock options: incentive stock options and non-
qualified stock options.
4. What is an incentive stock option (ISO)?
An incentive stock option (ISO) is an option that meets the Internal Revenue Code’s
requirements for preferential tax treatment. Generally, an ISO enables an employee to 1)
defer taxation on the option from the date of exercise until the date of sale of the
underlying shares of stock and 2) pay taxes at capital gains rates, rather than ordinary rates,
on the gain in the value of the stock when the shares are sold.
To qualify as an ISO, the following conditions must be met:
♦ Only employees can qualify for an ISO.
♦ The employee must hold the stock for at least one year after the exercise date or
two years after the grant date, whichever is later.
♦ Only $100,000 in value of stock options (determined as of the grant date) can first
become exercisable in any year.
♦ The exercise price must be equal to at least 100% of the market price of the
company’s stock on the date of the grant.
♦ The option must be granted under a written plan that has been approved by
shareholders, that specifies how many shares can be issued under the plan, and that
identifies the class of employees eligible to receive the options. Options must be
granted within 10 years of the date of the adoption of the plan.
♦ The option must be exercised with