A stock option at a given price (strike price) enable you to buy the stock at that price at a date in the future...for you the future is staggered, 20% after the first year etc.
In the markets, 1 stock option means the right to buy 100 shares, but lets say its 1 to 1 in your case.
So let me try to break it down...ok hammertime here...
You get hired, they give you 100 stock options.
You are eligible for 20 in the first year.
Upon receiving those, a "strike price" is noted...
the stock is trading at $20 at the next 15th of the month, so that is your "strike price"
Since the stock option gives you the "right to purchase" at the strike price,
you make money if the stock goes above $20, and then cash in those options.
If the stock subsequently dips below $20, your stock options are worthless.
(because the "right to buy" at $20 is worthless when you can get it cheaper in the market).
So they aren't actually giving you $20 of stock, they are promising you the difference
between $20 and where its trading when you sell them.
If its trading at $50 and you redeem them, you will get $30 for each one that you sell.
So each time you get an additional 5%, a "strike price" based on the current stock price at the time
will be noted, and anything above that strike price, you profit (if its higher WHEN you sell them).
So this is a commitment to the company because you want to stock to increase over time so that you make money on all of your stock options. Problem in many situations is that employees get hired when the stock is at $50, thus this is their strike price, and the stock then drops to $20 and they are completely worthless.
Managers and especially executives are hired with large stock option incentives. Often when a high executive is hired, and their stock is at $50, they are offered a large package of stock options at $60 or $70. So at that present time they are worthless, but is incentive for him to get the company in great shape so the stock price rises above $70 so that he can profit bigtime!
When they have stock options with strike prices that are above the market like that, but the company is crapping out well below the strike price (thus making his options worthless), he then hires Arthur Andersen to cook his companies books to show wall street that this company has billions of dollars in profits even though its actually losing money....and then ignorant wall street buys the stock up to $80, and then the executive sells his options for handy profit, and then he suddenly retires for "personal reasons" with millions in his pocket, while his former company subsequently files for bankruptsy and then lays of 15,000 innocent employees who still have stock options AND stock in the company, but they didn't sell it, and its now worthless...and they go poor without their job and savings, and lose their house.
What were we talking about.?
Go figure. I hope this helps.
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