An employee stock option is a call option on the common stock of a company, issued as a form

of non-cash compensation. Restrictions on the option (such as vesting and limited transferability)
attempt to align the holder's interest with those of the business' shareholders. If the company's
stock rises, holders of options generally experience a direct financial benefit. This gives
employees an incentive to behave in ways that will boost the company's stock price.

Employee stock options are mostly offered to management as part of their executive
compensation package. They may also be offered to non-executive level staff, especially by
businesses that are not yet profitable, insofar as they may have few other means of
compensation. Alternatively, employee-type stock options can be offered to non-employees:
suppliers, consultants, lawyers and promoters for services rendered. Employee stock options are
similar to warrants, which are call options issued by a company with respect to its own stock

Employee stock options (ESOs) are non-standardized calls that are issued as a private contract
between the employer and employee. Over the course of employment, a company generally
issues vested ESOs to an employee which can be exercised at a particular price, generally the
company's current stock price. Depending on the vesting schedule and the maturity of the
options, the employee may elect to exercise the options at some point, obligating the company to
sell the employee its stock at whatever stock price was used as the exercise price. At that point,
the employee may either sell the stock, or hold on to it in the hope of further price appreciation
or hedge the stock position with listed calls and puts. The employee may also hedge the
employee stock options with exchange traded calls and puts prior to exercise and avoid forfeiture
of a major part of the options value back to the company thereby reducing risks and delaying
taxes.

Contract differences

Employee stock options have the following differences from standardized, exchange-traded
options:

 Exercise price: The exercise price is non-standardized and is often the current price of
the company stock at the time of issue. Alternatively, a formula may be used, such as
sampling the lowest closing price over a 30-day window on either side of the grant date.
On the other hand, choosing an exercise at grant date equal to the average price for the
next sixty days after the grant would eliminate the chance of back dating and spring
loading. Often, an employee may have ESOs exercisable at different times and different
strike prices.
 Quantity: Standardized stock options typically have 100 shares per contract. ESOs
usually have some non-standardized amount.
 Vesting: Often the number of shares available to be exercised at the strike price will
increase as time passes according to some vesting schedule.
 Duration (Expiration): ESOs often have a maximum maturity that far exceeds the
maturity of standardized options. It is not unusual for ESOs to have a maximum maturity
of 10 years from date of issue, while standardized options usually have a maximum
maturity of about 30 months.
  Non-transferable: With few exceptions, ESOs are generally not transferable and must
either be exercised or allowed to expire worthless on expiration day. There is a
substantial risk that when the ESOs are granted(perhaps 50%) that the options will be
worthless at expiration. This should encourage the holders to reduce risk by hedging with
listed options.
 Over the counter: Unlike exchange traded options, ESOs are considered a private
contract between the employer and employee. As such, those two parties are responsible
for arranging the clearing and settlement of any transactions that result from the contract.
In addition, the employee is subjected to the credit risk of the company. If for any reason
the company is unable to deliver the stock against the option contract upon exercise, the
employee may have limited recourse. For exchange-trade options, the fulfillment of the
option contract is guaranteed by the Options Clearing Corp.
 Tax issues: There are a variety of differences in the tax treatment of ESOs having to do
with their use as compensation. These vary by country of issue but in general, ESOs are
tax-advantaged with respect to standardized options.
 Hedging Employee Stock Options". There is only one way to efficiently manage
your ESOs. That is to hedge with listed calls and puts. Hedges avoid forfeiting the
remaining time premium and delays taxes. It also reduces the speculative risks.

Valuation
The value of an ESOs follows the valuation techniques used for standardized options. The same
models used in valuing standardized options, such as Black-Scholes and the binomial model, are
also used for ESOs. Often, the only inputs to the pricing model that cannot be readily determined
is the estimate of future realized volatility of the stock, and the appropriate expected time to
expiration to use. However, there are a variety of services that are now offered to help determine
appropriate values.

As of 2006, the International Accounting Standards Board (IASB) and the Financial Accounting
Standards Board (FASB) agree that the fair value at the grant date should be estimated at the
grant date using an option pricing model. The majority of public and private companies apply the
Black-Scholes model, however, through September 2006, over 350 companies have publicly
disclosed the use of a binomial model in SEC filings.

Employee ownership occurs when a business is owned in whole or in part by its employees.
Employees are often given a share of the business after a certain length of employment or they
can buy shares at any time. A business owned entirely by its employees (such as a worker
cooperative) will not, therefore, have its shares sold on public stock markets, often opting instead
for mixed ownership arrangements involving a trust. Employee-owned companies often adopt
profit sharing where the profits of the company are shared with the employees. They also often
have boards of directors elected directly by the employees. Some corporations make formal
arrangements for employee participation, called Employee Stock Ownership Plans (ESOPs).

Employee ownership appears to increase production and profitability, and improve employees'
dedication and sense of ownership.[1][2] However, democratic leadership can lead to slow
decision-making, and employee stock ownership can increase the employees financial risk if the
company does poorly.[3] Notable employee-owned corporations include the John Lewis
Partnership retailers in the UK, and the United States news/entertainment firm Tribune
Company. The most celebrated (and studied) case of a multinational corporation based wholly on
worker-ownership principles is the Mondragon Cooperative Corporation.[4] Unlike in the United
States, however, Spanish law requires that members of the Mondragon Corporation are
registered as self-employed. This differentiates co-operative ownership (in which self-employed
owner-members each have one voting share, or shares are controlled by a co-operative legal
entity) from employee ownership (where ownership is typically held as a block of shares on
behalf of employees using an Employee Benefit Trust, or company rules embed mechanisms for
distributing shares to employees and ensuring they remain majority shareholders).[5][6]

Different forms of employee ownership, and the principles that underlie them,[7] are strongly
associated with the emergence of an international social enterprise movement. Key agents of
employee ownership, such as Co-operatives UK and the Employee Ownership Association
(EOA), play an active role in promoting employee ownership as a de facto standard for the
development of social enterprises.[8]

Most features of employee-owned corporations described in this article are not specific to any
one nation. The information on taxation and stock trading refers to United States law and may
differ elsewhere.[9]