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Contract differences
Employee stock options have the following differences from standardized, exchange-traded options:*'''Strike'''. The strike price is non-standardized and is often the current price of the company stock at the time of issue. Alternatively, a formula may be used, such as sampling the lowest closing price over a 30-day window on either side of the grant date. Often, an employee may have ESOs struck at different times and different strike prices.
*'''Quantity'''. Standardized stock options typically have 100 shares per contract. ESOs usually have some non-standardized amount.
*'''Vesting'''. Often the number of shares available to be exercised at the strike price will increase as time passes according to some vesting schedule. Vesting only occurs during the duration of the employment.
*'''Duration'''. ESOs often have a maturity that far exceeds the maturity of standardized options. It is not unusual for ESOs to have a maturity of 10 years from date of issue, while standardized options usually have a maximum maturity of about 30 months.
*'''Non-transferable'''. With few exceptions, ESOs are generally not transferable and must either be exercised or allowed to expire worthless on termination of employment.
*'''Over the counter'''. Unlike exchange traded options, ESOs are considered a private contract between the employer and employee. As such, those two parties are responsible for arranging the clearing and settlement of any transactions that result from the contract. In addition, the employee is subjected to the credit risk of the company. If for any reason the company is unable to deliver the stock against the option contract upon exercise, the employee may have limited recourse. For exchange-trade options, the fulfillment of the option contract is guaranteed by the credit of the exchange.
*'''Tax issues'''. There are a variety of differences in the tax treatment of ESOs having to do with their use as compensation. These vary by country of issue but in general, ESOs are tax-disadvantaged with respect to standardized options.