Grant

What is a 'Grant'

A grant is the issuance of an award, such as a stock option, to key employees under a stock plan. A stock option grants the employee the right to purchase a certain number of shares of the company's stock at a predetermined price. This price is called the grant price. There is usually a waiting period before an employee can exercise these stock options.

BREAKING DOWN 'Grant'

A grant is offered to employees only after they have worked at the company for a set period of time. Purchasing a stock option is also known as exercising. For more details on stock option grants and tips on determining the best time to exercise, read CNN Money's "Employee stock option plans."

Why Purchase Stock Option Grants?

From the employer's standpoint, the idea behind stock option grants is to give employees the incentive to align their interests with that of the stockholders. In the past, however, some stock option grants have been set at such low levels that executives ended up enriching themselves, not the shareholders.

From the employee's standpoint, a stock option grant is an opportunity to purchase stock in the company he or she works for at a lower price. Typically, the grant price is set as the market price at the time the grant is offered. It is advisable for an employee to purchase a stock option if the market price of the stock goes up in value: the grant price is still the same, so the employee is purchasing a stock at a lower price than market value.

Qualified vs. Non-Qualified Stock Option Grants

Non-qualified stock option (NSO) grants . They can be transferred to a child or a charity, depending on the specific company's policies. Non-qualified stock option grants are tax deductible by the company that provides them. Since the grant is provided at a specific price, which is usually lower than the market value for the company's stock, employees who choose to take advantage of this opportunity pay income tax on the difference between these two prices upon purchase. It's important to note that employees are not subject to taxes when the option becomes available to them; rather, they only pay taxes when they purchase a stock option.

For a breakdown on exactly what determines a non-qualified stock option and how it is taxed, read Non-Qualified Stock Options.

A qualified stock option grant, also known as an incentive stock option (ISO), is eligible for a special tax treatment: you don't have to pay income tax when you purchase an option, and you instead pay capital gains tax when you sell the option, or taxes on the profits made from the stock option. However, the grant might not be provided at a lower price than market value, as non-qualified options are. Also, this type of grant is riskier, as the employee must hold on to the option for a longer period of time to qualify for this tax treatment. This type of grant is usually reserved for the higher level employees, and the company cannot write off the grant as a tax deduction. ISOs cannot be transferred to another person or entity, unless through a will.

To learn more about how ISOs work and how they are taxed, read Introduction To Incentive Stock Options.

For a guide on both types of stock options and how to handle each, read The Best Strategies to Manage Your Stock Options.

RELATED TERMS
  1. Options Backdating

    The process of granting an option that is dated prior to the ...
  2. Non-Qualified Stock Option - NSO

    A type of employee stock option where you pay ordinary income ...
  3. Reload Option

    A type of employee compensation in which additional stock options ...
  4. Option Schedule

    A list of options grants to an employee or employees of a company ...
  5. Qualifying Disposition

    A sale, transfer or exchange of stock obtained through a qualified ...
  6. Equity Compensation

    This is one way to attract and retain employees to a startup ...
Related Articles
  1. Investing Basics

    Get The Most Out Of Employee Stock Options

    These plans can be lucrative for employees - if they know how to avoid unnecessary taxes.
  2. Options & Futures

    The Benefits And Value Of Stock Options

    The pros and cons of corporate stock options have been debated since the incentive was created. Learn more about stock option basics and the cost of stock options.
  3. Investing Basics

    What is a Stock Option?

    An employee stock option is a right given to an employee to buy a certain number of company stock shares at a certain time and price in the future.
  4. Stock Analysis

    Our View on Stock Options

    In this piece, David Harper wades deep into the option expensing ruling and what this really means to investors.
  5. Entrepreneurship

    Government Grants for Women-Owned Businesses

    Explore options for financial grants as a female business owner, and discover helpful resources for alternate ways of funding a business, including loans.
  6. Options & Futures

    Types of Options

    There are many different types of options. In addition to general put options and call option, we will discuss 13 different types of options. Some of these option types are better suited to day ...
  7. Options & Futures

    10 Tax Tips For Stock Options

    Options and restricted stock are a great perk--if you don't get caught in a tax trap. Here's what you need to know.
  8. Options & Futures

    Stock Options: What's Price Got To Do With It?

    A thorough understanding of risk is essential in options trading. So is knowing the factors that affect option price.
  9. Options & Futures

    Avoid Premature Exercise On Employee Stock Options

    With early exercise, you forfeit some profit back to your employer, and incur income tax to boot.
  10. Investing

    The Best Strategies to Manage Your Stock Options

    We look at strategies to help manage taxes and the exercise of incentive and non-qualified stock options.
RELATED FAQS
  1. What are the SEC regulations on exercising stock options?

    Learn how the SEC and IRS regulate employee stock options, including the exercise of options and the sale of options, and ... Read Answer >>
  2. How can derivatives be used to earn income?

    Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >>
  3. How do I change my strike price once the trade has been placed already?

    Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
  4. What are the tax implications if I sold my private company stock options?

    I am 29 years old and have taken a full-time position with a company who offers me the option to buy 5,000 shares currently ... Read Answer >>
  5. Are put options more difficult to trade than call options?

    Learn about the difficulty of trading both call and put options. Explore how put options earn profits with underlying assets ... Read Answer >>
  6. How can I find out which stocks also trade as options?

    The trading of options has become increasingly popular among retail investors as they become aware of the many different ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center