Essentially, you’ve been granted the option – not the obligation – to purchase shares in the company at a predetermined price, the exercise price (sometimes called the strike price).
For example, let’s say you’ve been granted the option to purchase 1,000 shares in the company, with an exercise price of £0.10 per share.
A few years later, the company’s share price increases to £1 per share. Once your options have vested and become exercisable (more on this below), you can purchase 1,000 shares worth £1 each for just £0.10 per share.
Sounds like a no-brainer, right? In this scenario, it is. And that’s the great thing about options. You get the opportunity to purchase shares below their market value, granted the company’s share price has increased above your exercise price!
So, about your options becoming ‘exercisable.’ Your option agreement will include an exercise condition, “Exercisable” or “Exit only.”
We go into more detail about each condition in the FAQ How do I sell my shares, but here’s a quick overview.
- Exercisable: option holders can request to exercise their options as and when they vest
This exercise condition gives option holders more flexibility as an exit isn’t always guaranteed. Once the options are exercised, the shares are yours to keep for as long as you like.
- Exit only: option holders can exercise their options only when the company goes through an exit
An exit could be a sale, merger, management buyout, company buyback, asset sale or IPO. When an exit occurs, your options become exercisable. The options are then converted into shares and the shares are immediately sold to the buyer.
Companies that are gearing up for an exit will often use the Exit only condition to ensure their employees reap the rewards for their hard work in helping grow the business to this point.
- What is vesting?
- What is exercising?
- How do I sell my shares?
- 5 things to know about EMI
- 5 things to know about options
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