Overhang

AAA

DEFINITION of 'Overhang'

A measure of the potential dilution to which a common stock's existing shareholders are exposed due to the potential that stock-based compensation will be awarded to executives, directors or key employees of the company. It is usually represented in percentage form and is calculated as stock options granted, plus the remaining options that have yet to be granted divided by the total shares outstanding.

INVESTOPEDIA EXPLAINS 'Overhang'

There is no precise rule-of-thumb for determining what level of options overhang is bad for investors but, generally speaking, the higher the number, the greater the risk. If a company has a very high options overhang, it must generate even higher levels of growth in order to provide decent returns to investors net of the overhang's dilutive effects on investor returns.

RELATED TERMS
  1. Employee Stock Ownership Plan - ...

    A qualified, defined contribution, employee benefit (ERISA) plan ...
  2. Exercise

    To put into effect the right specified in a contract. In options ...
  3. Incentive Stock Option - ISO

    A type of employee stock option with a tax benefit, when you ...
  4. Option

    A financial derivative that represents a contract sold by one ...
  5. Non-Qualified Stock Option - NSO

    A type of employee stock option where you pay ordinary income ...
  6. Dilution

    A reduction in the ownership percentage of a share of stock caused ...
Related Articles
  1. The
    Options & Futures

    The "True" Cost Of Stock Options

  2. A New Approach To Equity Compensation ...
    Options & Futures

    A New Approach To Equity Compensation ...

  3. Should Employees Be Compensated With ...
    Options & Futures

    Should Employees Be Compensated With ...

  4. The Controversy Over Option Expensing
    Options & Futures

    The Controversy Over Option Expensing

Hot Definitions
  1. Return On Sales - ROS

    A ratio widely used to evaluate a company's operational efficiency. ROS is also known as a firm's "operating profit margin". ...
  2. Halloween Strategy

    An investment technique in which an investor sells stocks before May 1 and refrains from reinvesting in the stock market ...
  3. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  4. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  5. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  6. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
Trading Center