Evergreen Option

DEFINITION of 'Evergreen Option'

A type of employee stock option plan in which additional shares are automatically granted to the plan every year. Under an evergreen option plan, the number of shares granted is based on a set percentage of the company's common shares outstanding. In most cases, these plans don't have an expiration date and do not require shareholder approval. However, the board of directors must approve how many shares will be automatically allotted to the plan each year.

An evergreen option may also be called an "evergreen provision" or "evergreen plan."

BREAKING DOWN 'Evergreen Option'

An evergreen option gives a publicly traded company a way to attract and retain excellent managers and employees by providing them with additional compensation above and beyond a salary. Because the shares granted by an evergreen plan will be worth more to the managers and employees who receive them if the company performs well, evergreen plans help align their interests with those of shareholders.

The downside of evergreen provisions for shareholders is that the annual issuance of additional shares causes dilution. Moreover, the new shares may be issued even if the company isn't performing well.

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