Incentive Stock Option
An incentive stock option is a type of compensation in the form of an agreement between an employer and an employee that allows the employee to purchase shares of the employer’s stock at a specified price (i.e., the “strike price”). A stock option typically has a vesting requirement, which means that the employee may exercise the stock option (i.e., purchase the employer’s stock at the strike price) only after a specified period of time has passed. The employee typically forfeits the unvested stock option if the employee’s employment terminates before the stock option has vested. After the stock option vests, the employee may exercise the stock option until the stock option expires. Once the stock option has expired, the employee no longer has the right to purchase the stock at the strike price.
An incentive stock option is a type of “call option” because it provides the right to purchase stock. Unlike some other types of call options, however, an incentive stock option is not traded on the open market.