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What are stock options and how do they work?

A San Diego employee who is taking on his or her first job after graduating college may be expected to sign an employment agreement of some sort before starting work. This agreement may discuss the employee’s access to stock options, which employers may but not have to offer to their employees.

Basically, and as the name implies, a stock option allows an employee the opportunity to buy shares in a company’s corporate stock. The reason this option is an advantage to an employee who might otherwise be able to buy the stock on the open market for the listed price of that day is that the price of the stock offered under the option is fixed, and this fixed price is called the exercise price.

The idea would be for an employee to exercise his or her option to buy stock and thereby invest in the company when the exercise price is lower than what the stock is trading at on the open market. If for example, the employee buys 300 shares of stock at the exercise price of $10 a share, but each share is trading at $15 a share, then the employee can presumably go sell what she bought for $3,000 on the open market for $4,500.

Obviously, both a company and an employee have a lot of risk to account for when it comes to stock options. It is therefore no surprise that the parts of an employee’s contract that cover stock options can be complicated. Moreover, disputes can arise when an employer does not want to allow an employee to use a stock option but the employee feels entitled to do so.

It is therefore important for California employees to have a good understanding up front as to what exactly their rights under a promise of stock options really are. Oftentimes, an experienced employment law attorney with knowledge of how employee benefits work can be of valuable assistance in getting a good understanding of these rights.


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