Share Option

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

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.
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.

Equity Compensation: Payment made to employees using company shares or options to buy shares.
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.
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.

### What is a primary benefit of share options for employees? - [ ] Instant cash reward - [ ] Permanent job security - [x] Ability to purchase shares at a fixed price - [ ] Free company benefits > **Explanation:** The primary benefit of share options is that employees can purchase company shares at a fixed, favorable price, potentially yielding significant financial gain if the company performs well. ### When are share options taxable? - [ ] When granted - [ ] When they expire, whether exercised or not - [x] Upon exercising the option - [ ] They are never taxable > **Explanation:** Share options typically become taxable upon exercising the option, with the gain (market price minus exercise price) subject to income tax. ### What does the exercise price refer to? - [ ] The current market value - [x] The fixed price for purchasing shares - [ ] The amount paid to transfer shares - [ ] The price set during IPO > **Explanation:** The exercise price is the fixed price at which an employee can purchase the shares when exercising the share option. ### Which of the following represents a vesting period? - [x] The time required for an employee to earn the right to exercise share options - [ ] The period for filing taxes on earned shares - [ ] The duration for transferring shares - [ ] The limit on company share ownership > **Explanation:** The vesting period refers to the time over which an employee earns the right to exercise their share options, often connected to tenure. ### What is likely the main use of share options in a company? - [ ] Reducing payroll taxes - [ ] Fulfilling regulatory requirements - [x] Attracting and retaining employees - [ ] Setting fixed stock prices > **Explanation:** Companies primarily use share options to attract and retain skilled employees, aligning their interests with company growth and success. ### What happens if an employee leaves the company before the vesting period ends? - [x] They forfeit the right to exercise the yet-to-be-vested options - [ ] They can still exercise all their granted options - [ ] They must immediately sell any vested shares - [ ] They do not face any consequences > **Explanation:** If an employee leaves the company before their options vest, they typically forfeit their unvested share options. ### Which company type commonly offers share options? - [ ] Closed Corporations - [x] Public Companies - [ ] Sole Proprietorships - [ ] Nonprofits > **Explanation:** Public companies commonly offer share options as part of their compensation packages to align employees' interests with company performance. ### What is a potential downside of share options for employees? - [ ] Guaranteed expenses - [x] Options may become worthless if the share price doesn't increase - [ ] Immediate taxation upon grant - [ ] Forced retention period > **Explanation:** The primary risk for employees is that if the share price does not exceed the exercise price, the options may be worthless. ### How do share options benefit companies? - [ ] By generating additional stock market revenue - [ ] By reducing operating costs significantly - [x] By incentivizing top talent and improving retention - [ ] By simplifying payroll management > **Explanation:** Share options are advantageous for companies because they incentivize high performance and improve employee retention by offering a stake in company success. ### In a stock option plan, what does "at-the-money" mean? - [x] The exercise price is equal to the current market price. - [ ] The share price is below the exercise price. - [ ] Share price has reached an all-time low. - [ ] "At-the-money" is not a recognized term. > **Explanation:** "At-the-money" refers to options when the exercise price is equal to the current market price of the underlying shares.

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