Learning stock option lingo is an important step in making sure you understand what you are being offered. Here are some of the key terms you should know:

Allocation: The crediting of a certain number of shares to an individual, either directly or in an account in a stock plan.

Book Value: The value of a business based on its assets minus liabilities.

Change in Control: A transaction that alters the ownership of a corporation. Such transactions include mergers and consolidations, stock sales, and asset sales. Typically, an employee stock ownership plan will provide for the disposition of outstanding stock option grants or other share awards in the event of a "change in control" of the issuer.

Cliff Vesting: The vesting schedule for an employee stock option or ownership plans where all of the shares of stock or the stock options vest (or are earned) on the same date.

Common Stock: The basic ownership interest of a corporation that typically confers on the holder of the security the right to vote, select directors, receive dividends, and share in the residual assets upon the dissolution or winding up of the business. Unlike preferred stock, common stock has no preference to dividends or to any distribution of assets by the corporation. Common stock holders are the last in line to receive any distribution of assets when a business is dissolved.

Date of Exercise: The date on which an employee stock option is exercised and some or all of the shares of stock underlying the stock option are purchased by the optionee.

Date of Grant: The date upon which an employee stock option is formally extended to an individual and becomes effective. The grant gives rise to certain contractual rights and obligations on the part of the optionee and the corporation.

Dilution: The effect on existing shareholders created when additional shares in the company are issued. Thus, a shareholder owning 100% of a company's 1,000 shares would be diluted by 9.1% if the company issued another 100 shares (1,100 shares now existing times 9.1% = 100 shares). The shareholder now has 90.9% of the company's shares (100% - 9.1% = 90.9%)

Distribution: The provision of shares or their monetary equivalent to employees out of an account held by the employee or in a direct disbursement of shares to an employee.

Equity: Refers to an ownership interest in a corporation. Equity also represents the amount of capital invested by the shareholders/stockholders plus the retained earnings of the business. The term is also used to denote the capital stock of a corporation.

Exercise: The transaction in which an optionee elects to purchase some or all of the shares of stock underlying an employee stock option.

Expiration Date: The last date on which an employee stock option may be exercised by an optionee. This date is typically set forth in the option agreement for the employee stock option and usually ranges from five to ten years following the date of grant of the employee stock option. Also refers to the date on which an employee stock option plan expires.

Fair Market Value: The value of a corporation's equity securities. In the case of a publicly traded corporation, fair market value is typically based upon the price at which the corporation's stock is traded. In the case of privately held corporations, fair market value is typically based upon an independent appraisal conducted by one or more third parties or determined by the board of directors based on all of the relevant facts and circumstances.

Grant: A contractual right granted to an individual to purchase a specified number of shares of stock of the granting corporation at a specified price for a specified period of time. Also known as a "stock option."

Offering Period: With respect to an employee stock purchase plan, the period during which an employee can set aside funds to purchase shares through payroll deductions. Employers then determine at which points during the offering period an employee can buy the shares.

Option: A contractual right granted to an individual to purchase a specified number of shares of stock of the granting corporation at a specified price for a specified period of time.

Right of First Refusal: The right of the holder, typically the company, to match any offer an employee receives on shares held by the employee. If the holder of this right matched the offer, the employee would have to sell to the holder.

Share: An individual unit of a class of equity securities that represents the basic ownership interest of a corporation, usually denoted by a share certificate.

Spread: Describes the difference, if any, between the option price and the fair market value of the corporation's stock on the date of exercise. Typically, in the case of a non-qualified stock option, the "spread" on exercise represents the compensation income recognizable by the optionee for income tax purposes and, in the case of an incentive stock option; the "spread" on exercise represents the adjustment item for purposes of computing the employee's alternative minimum taxable income.

Stock Option: A contractual right granted to an individual to purchase a specified number of shares of stock of the granting corporation at a specified price for a specified period of time. Also known as a "grant."

Vesting: The process of earning shares of stock granted under an employee stock plan; the process by which rights under a plan become nontransferable or not subject to a substantial right of forfeiture. Typically, vesting is achieved by satisfying one or more specific service- or performance-based conditions.

Source: National Center for Employee Ownership

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