Employee Stock Option

Employee stock option is a stock option granted to specified employees of a company. ESOs carry the right, but not the obligation, to buy a certain amount of shares in the company at a predetermined price. Employees typically must wait a specified vesting period before being allowed to exercise the option.

The idea behind stock options is to align incentives between the employees and shareholders of a company. However, ESOs are like a free lottery ticket and is different from owning the stock outright. Some claim that ESOs give company executives incentives to pump up stock prices for short term profit. There is still a debate over whether and how to account expenses for ESOs on income statements.