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.


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.

  1. Non-Qualified Stock Option - NSO

    A type of employee stock option where you pay ordinary income ...
  2. Incentive Stock Option - ISO

    A type of employee stock option with a tax benefit, when you ...
  3. Employee Stock Ownership Plan - ...

    A qualified, defined contribution, employee benefit (ERISA) plan ...
  4. Option

    A financial derivative that represents a contract sold by one ...
  5. Exercise

    To put into effect the right specified in a contract. In options ...
  6. Dilution

    A reduction in the ownership percentage of a share of stock caused ...
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