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| What is a stock option ? |
One of the ways a company can reward its employees is by granting
them stock options. A stock option is just that - an option, or
a choice - to buy shares. Your options give you the opportunity
to buy your company’s shares in the future at a price determined
at the time of grant. If the stock price goes up, your options
would be valuable. If the stock price goes down, then you simply
don't use your option - there's no risk to you.
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| Can ESOPs be used for improving performance
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Yes, ESOPs help in creating a vibrant ownership culture across
the entire organization. Ownership culture is one in which employees
are encouraged to think and act like ‘owners’. It
is expected that ESOPs will result in improvement of individual
and group performance as a result of alignment of goals of the
employee and the organization.
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| Why is an option valuable ? |
An option is valuable as it gives you a right
(with no obligation) to purchase the shares at a pre-set price.
As a result of which, if the shares increase in value, you will
be able to purchase the shares at the lower option price provided
the options have vested. However, if the share decreases after the
option is granted and vested, you may choose not to exercise the
options, and thus you are insulated from the risk of downward movement
of the company’s share price.
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| What is the ''option'' in a stock options ? |
An option is a commitment by the company to grant options to
employees on the fulfillment of all conditions mentioned in the
ESOP Plan. It is however a right given to you and not an obligation
to buy shares of the company in future at pre-determined prices.
You have a choice to decide whether to buy the shares or not.
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| What is vesting ? |
Vesting has two components – vesting percentage
and vesting period. Vesting percentage refers to that portion of
total options granted, which you will be eligible to exercise. Vesting
period is the period on the completion of which the said portion
can be exercised.
The following table presents an example of an employee who is granted
200 options on January 1, 2004 with a vesting schedule of 30%, 30%
and 40% at the end of one, two and three years from the date of
grant respectively.
Vesting
Details |
Date
of grant: January 1,2004 |
1st
Vesting |
2nd
Vesting |
3rd
Vesting |
Percentage |
30% |
30% |
40% |
Date |
January 1,2005 |
January 1,2006 |
January 1,2007 |
Options vested |
60 |
60 |
80 |
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| What is exercise ? |
The activity of converting the options granted
to you into shares by paying the required exercise price is known
as exercise of options.
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| What is exercise price ? |
Exercise price is the price that you have to pay to convert the
options into shares e.g. if the options are granted at an exercise
price of Rs.30 and you want to exercise 100 options then you have
to pay Rs. 3,000 (30 x 100).
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| What is exercise period ? |
This is the period within which you can decide to exercise your
options. This period starts from the date of vesting.
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| What is the ideal time to exercise ? |
Once your options are vested, the decision to exercise stock
option remains with you only. Exercising stock option is an important
personal financial decision and you should consider it carefully
as any other long-term investment decision. You should make your
personal financial strategy based upon your financial goals. You
may consult your personal financial adviser and tax adviser, if
required.
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| What is lapse of options ? |
Options lose their validity in certain circumstances i.e. expiry
of the exercise period, separation, abandonment etc. These options
then cannot be converted into shares and lose their value. Such
options are said to be lapsed.
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| If I have stock options, does that mean I own
shares ? |
No. The Options are not actual shares, but a right to buy shares.
They become shares only when you exercise that right.
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