DEFINITION of 'Reload Option'
A type of employee compensation in which additional stock options are granted upon the exercise of the previously granted options. Reload options are features which, rather than pay the employee in cash, upon being exercised, the employee is compensated in shares. The exercise price of the newly granted option is set to the market price of the shares on the date the reload option is granted.
BREAKING DOWN 'Reload Option'
A reload option is a stock-for-stock option. For example, an employee who is granted a reload stock option with a term of 10 years but who exercises the option after six years may be granted a reload option for shares with a term of four years. The new grant is for the same number of years as the underlying option. Rather than having to come up with the money required to pay for the shares of the underlying option, the employee is given a new option which intrinsically has value.
For example a CEO, Dave, holds a reload option. Each option is to purchase 1,000 shares at $25 each. If the stock price goes up to $40, Dave could exercise by delivering 625 shares and receiving 375 shares (this is the stock-for-stock option). Dave would receive a new option to purchase 625 shares for $40 (this is the reload). Essentially, Dave will still gain or lose on 1,000 shares.