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What are employee stock options?

Stock options are typically granted to executives and employees to align their efforts with the overall goals of the organization. When a company issues stock options to employees, employees will hold the options over a service or vesting period, and then exercise them at a future date.

Each stock option will have an exercise price, which is the price the employee must pay when the options are exercised. In return, the employee will be able to sell the options for their current fair-market-value.

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  • How is total stock compensation expense calculated?

    Total stock compensation expense is calculated by taking the number of stock options granted and multiplying by the fair market value on the grant date. Once you have the total stock option expense, divide by the vesting or service period (# of years), and that determines how much stock compensation expense is recorded in each period. For example, if 100,000 shares are granted with a FMV of $15 per share with a vesting period of 3 years, then total stock compensation expense is $1,500,000 and you record $500,000 of stock compensation expense in each year.