Definition§
A share option is a benefit offered by companies to their employees, enabling them to buy shares at a favorable fixed price or at a specified discount to the market price. The variance between the share’s value when acquired (or sold) and the amount paid to exercise the option is usually taxable as income. Share options are strategic tools for attracting and retaining employees, aligning their interests with company success, and potentially providing substantial financial benefit.
See also: [Enterprise Management Incentives], [Savings Related Share Options Scheme].
Term 2: See [option]
Examples§
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Startup Equity Grants: A technology startup grants share options to its new hires. An employee receives options to purchase 1,000 shares at $5 per share. If the market value rises to $20, the employee can buy shares for $5 each and might realize $15 per share in gain.
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Long-term Incentive Plan: An established corporation issues stock options to senior executives as part of their long-term incentive plan, vesting over four years. These options are exercised at $50 per share while the market price is $100, resulting in significant profit for the executives.
Frequently Asked Questions§
Q: What happens if the share price does not increase?
A: If the share price does not exceed the exercise price of the share options, the options may not be exercised since they would not yield a profit. Therefore, employees could forfeit the potential benefits.
Q: Are share options subject to tax?
A: Yes, the gain realized upon exercising a share option, which is the difference between the market value and the exercise price, is usually subject to income tax.
Q: How long do employees typically have to exercise their share options?
A: The exercise period varies by company but is usually set by the company’s share option plan, ranging from 5 to 10 years from the grant date.
Related Terms§
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Equity Compensation: Payment made to employees using company shares or options to buy shares.
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Option: A financial derivative representing a contract sold by one party (option writer) to another party (option holder). This contract offers the buyer the right, but not the obligation, to buy/sell a security at a predetermined price.
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Vesting Period: The period over which an employee earns the right to exercise share options, typically tied to their length of employment.
Online Resources§
Suggested Books§
- “Employee Stock Option Plans” by David M. Moss - Comprehensive guide to designing, implementing, and managing employee stock option plans.
- “Equity Compensation Strategies” by Barbara Baksa - Detailed roadmap for companies looking to optimize their equity compensation strategies.
- “Equity Compensation for Dummies” by Mark J. Bethesda - Simplified explanation on the fundamentals of equity compensation for employees and employers.
Accounting Basics: “Share Option” Fundamentals Quiz§
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