The value of employee stock options is based on the price of shares in comparison to the strike price. The strike price is usually the stock’s market price at the time an employer offers stock options to an employee. Sometimes this price is even discounted further to provide extra benefits to employees. While regular stocks can be regularly traded, employers set aside shares specifically for employees to purchase and create a limit on how much an individual employee can own.
Grants are how your company awards you employee stock options. You and the company will sign an agreement that documents the terms of the stock options, along with the grant date, which is the day your stock options begin vesting. This grant will give you all the details of your individual plan, including:
- Type(s) of stock options
- Amount of shares you’re awarded
- Strike price
- Vesting schedule
The process of earning the right to exercise your options is called vesting. When a stock option is fully vested, it means that it’s actually available for you to exercise or buy. Vesting periods also allow employers to optimistically rely on employees staying with their company for a certain period of time and eliminate the chance of new hires immediately selling their stock and leaving the company.
A common vesting period is 4 years with a 1 year cliff, meaning that after 1 full year of employment, employees have access to a portion of their stock options. After that first year, they’ll be able to gradually earn more of their stock options through monthly or yearly increments until they’ve received the full amount of shares after the full vesting period (in this case, you would be fully vested after 4 years).