Incentive Stock Option

An incentive stock option is a type of compensation, in the form of an agreement between an employer and an employee, that allows the employee to purchase shares of the employer’s stock at a specified price (i.e., the “strike price”). A stock option typically has a vesting requirement, meaning that the employee may exercise the stock option (i.e., by purchasing the employer’s stock at the strike price) only after a specified period of time has passed. If the employee’s employment terminates before the stock option has vested, the employee typically forfeits the unvested stock option upon termination. After the stock option vests, the employee may exercise the stock option until the stock option expires. Once the stock option has expired, the employee no longer has the right to purchase the stock at the specified price (i.e., strike price).

An incentive stock option is a type of “call option” because it provides the right to purchase stock. Unlike some other types of call options, however, an incentive stock option is not traded on the open market. 

 

This guide is not intended to provide investment advice, and you should not rely on statements in this guide when making investment decisions.

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