What Is a Reload Option?
A reload option is a type of employee compensation in which additional stock options (ESO) are granted upon the exercise of the previously issued options. Reload options are features which, rather than paying the employee in cash, upon being exercised the employee is compensated in shares of the company's stock. The exercise price of the newly granted (reloaded) option is set to the market price of the shares on the date the reload option is granted.
How a Reload Option Works
A reload option is a stock-for-stock option granted to employees of a firm. For example, an employee who is granted a reload stock option with a term of 10 years but who exercises the option after just six years may be granted a reload option for shares with a term of four years. The new grant is typically 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 has intrinsic value.
A stock-for-stock option is a method used in issuing ESOs that satisfies the option price in an employee stock option compensation scheme. Under these compensation programs, employees are granted stock options - but they must pay the company the price of the option before they are given the grant
By exchanging mature stock (stock that has been held for a required holding period), the employee can then receive his or her options without having to pay for them. After a given time period, employees are given back the stock they used to pay for their options. Firms that grant ESOs like the advantage of a stock-for-stock exchange, since they require no cash outlay.
Example of a Reload Option
For example, a CEO, Dave, has been granted a reload option. Each option contract gives Dave the right to purchase 1,000 shares of his company's stock at $25 each. If the stock price goes up to $40, Dave could exercise by delivering 625 shares (worth $15,625 at $25 each) and receiving 375 shares (worth $15,000 at $40 each).
Remember, this is the stock-for-stock option scheme. Dave would then receive a new option to purchase the remaining 625 shares for $40 (this is the reload). Either way, Dave will still gain or lose on the full 1,000 shares, but he is better off since his total outlay for the option is now $625 ($15,625 - $15,000) instead of $25,000 (1,000 x $25).