Employee stock option plans can be confusing, but it doesn't mean they have to be. Have a read of our simplest breakdowns of the commonly used terms below and bookmark this one for later use. If you're hungry for more info, sink your teeth into our Employee Stock Options Guide, available for download right at the bottom of this page! Let's get into it..
EMI means Enterprise Management Incentive scheme.
ESOP means Employee Stock Option Plan.
ESOW means employee stock ownership plan.
Exercise means the process of converting a Vested Option into an ordinary stock. An Option can be Exercised when the Option has Vested, and the Exercise Price is paid.
Exercise Period means the period in which an employee can Exercise Options. Often, an employee won’t Exercise Options straight after Vesting, and will wait to Exercise them later on (for example, at an exit).
Exercise Price means the amount to be paid by the employee to Exercise the Option. In many countries, an approved valuation is required to determine this price. This is often also referred to as a Strike Price.
Exit Event means when the owners of a company “exit” the business by selling the business, for example by Initial Public Offering (listing) or acquisition by a third party.
Grant Date means the date the Options are Granted (or “issued”) to the employee or contractor under the Offer. Lapse means what happens to an Option when specific Vesting criteria is not met, and the Option can be transferred back into the Option pool for re-allocation.
Offer means an offer for Options made to an employee or contractor, made via an ESOP Offer Letter.
Offer Letter means the agreement setting out the number of Options being allocated, the Vesting conditions, and relevant Exercise and Options Price. In some jurisdictions this is referred to as an Award Agreement or an Option Agreement.
Option means an Option to purchase a stock. Until an Option has Vested and been purchased, it is not a stock. It is a legal right to purchase a stock at a later date, if certain conditions are met.
Option-holder means any employee or contractor who has been offered (and accepted such offer) options to purchase stocks under an ESOP.
Option Price means the price the employee pays to be Granted the Options. In most jurisdictions, this is usually set at $0. Start Date means the date the Vesting Period starts ticking. This can be the Start Date of employment, or another date.
Scheme means the rules of the ESOP, also commonly referred to in other jurisdictions as the ESOP Scheme.
Strike Price has the same meaning as Exercise Price.
Vesting means the process by which the Option holder earns full rights to their Options, to allow them to be converted to stocks. This can happen by way of meeting certain time-based Vesting conditions, or other performance based milestones. Only Vested Options can be Exercised to become stocks.
Vesting Period means the time from the Start Date, to the date the last Options will Vest under the Vesting conditions.
At Cake, we live and breathe employee share option plans so we know which questions are keeping you up at night. We answer them in this guide. Whether you've just received options or are planning to set up a plan for your company, you've found the place to start.
You'll get the recipe for ESOP success and explain in-depth best-practice standards for ESOPs globally and in your country. We’ve done the hard work, so you can rest easy.
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