An Employee who qualifies for issue of Options under the ESOP-scheme and who
fulfils the minimum conditions of service and other conditions as decided in
the appraisal process.
Exercise
It
is the act of an application being made by the Employee to the Company to have
the Options vested in him issued as Shares upon payment of the Exercise Price.
Exercise can take place as specified after Vesting.
Exercise Period
The
period from the date of vesting of options till the date the options can be
exercised. On the expiry of the Exercise Period, any Options that have not been
exercised will lapse and cease to be valid for any purpose.
Exercise Price
The
amount to be paid by an Optionee at the time of Exercise of his option. This
price is determined at the time of grant and remains constant over the term of
the option.
Grant
Grant means issue of options to employees under ESOP
Market price
Market price of a share on a given date means the closing price of the shares on
that date on the stock exchange on which the shares of the company are listed.
Foreign Employee
An
Employee who is a person resident outside India as defined in Sec.2(q) of The
Foreign Exchange Regulation Act, 1973 or an Employee who is a foreign national
or an Employee of a subsidiary company in a foreign country. (This definition is
according to the RBI Guidelines)
Vesting Period in lieu of
IPO (Initial Public Offer)
In
the event of the equity shares of the Company not being listed in any recognized
stock exchange at the end of vesting period, such period starting from the end
of the vesting period and ending on a date 15 days prior to the filing of the
Offer Document with SEBI (Securities and Exchange Board of India) or at any time
at the discretion of the ESOP Advisory Committee to comply with the prevalent
SEBI guidelines at the point of conversion, shall be called vesting period in
lieu of IPO.
Option
Option means a stock option granted pursuant to the Plan, comprising of a right
but not an obligation granted to an Employee under the Plan to apply for and be
allotted Shares of the Company at the Exercise Price determined earlier, during
or within the Exercise Period, subject to the requirements of Vesting.
Optionee
Optionee means the holder of an outstanding Option granted pursuant to the Plan.
Vesting
Vesting means the process by which the employee gains full rights to the options
granted to him in pursuance of ESOP.
Vesting period
The
period during which the vesting of the option granted to the employee in
pursuance of ESOP takes place.
Amortization
An
accounting procedure that gradually reduces the cost or value of an asset
through periodic charges against income
Option discount
Option discount means the excess of the market price of the share at the date
of grant of the option under ESOP over the exercise price of the option
Book Value
It is the value at which an asset is carried on a balance sheet. The book
value of a share is given by dividing the equity reserves of the company by
the number of shares issued.
Beta
A
measure of a security's performance in relation to the general movement of the
market. A share with a beta of 1 rises and falls corresponding exactly to the
market. The rise or fall of a security with a beta higher than 1 is more than of
the market and the rise or fall in a security with a beta less than 1 is less
than the rise or fall in the market index.
Share Price
This denotes the market price of the stock today.
Interest Rate
The
simple risk-free interest rate for the period. Strictly, the Black-Scholes
valuation model requires the interest rate to be a continuously compounded rate.
Option Type
This denotes the type of ESOP i.e. Loyalty, Bonus, Growth etc.
Option Value
The
theoretical (or fair) value of the option. It is made up of two parts i.e., the
intrinsic and time value.
ESOP
In
India ESOPs generally mean Employee Stock Option Plans. In USA, ESOP is not
equivalent to the stock option plans that we normally refer to. ESOP stands for
Employee Stock Ownership Plan and it refers to Ownership of a business by its
employees.
Expiration Date
The
Expiration Date of Options is a predetermined date at which time you must make
the decision of exercising your Options. If you do not exercise your options
till the expiration date, they expire/lapse and cannot be exercised after that
day.
Vesting Schedule
The
vesting schedule gives the details of the vesting of options granted under the
ESOP Plan It gives the vesting period and the percentage of the total options
granted that can be exercised after the completion of the vesting period.
Historical Volatility
The
Historical Volatility of the Stock means the Volatility of the Stock using
historical price Information, i.e. a measure of the previous fluctuations in
share price
Implied Volatility
Implied volatility is the volatility implied by an option price observed in the
market. To calculate implied volatility, instead of inputting a volatility
parameter into the Black-Scholes model to determine an option's fair value, the
calculation is turned round and the actual current option price is input to get
the implied volatility as the output.
At-The-Money
An
option is at-the-money if the exercise price of the option is equal to the
market price of the underlying security.
Derivative Security
A
financial security whose value is determined from the value and characteristics
of another security. The other security is referred to as the underlying
security.
Hedge
Protecting the price of a financial instrument or commodity at a date in the
future by undertaking an offsetting position using options, futures or another
instrument.
European-Style Options
An
option contract that may be exercised only during a specified period of time
just prior to its expiration.
In-the-money
An
option is in the money if the exercise price is less than the market price of
the underlying security.
Out-Of-The-Money
An
option is out-of-the-money if the exercise price is greater than the market
price of the underlying security.
Time value
The
portion of the option premium that is attributable to the amount of time
remaining until the expiration of the option contract. Time value is whatever
value the option has in addition to its intrinsic value. This is often referred
to as premium.
Volatility
A
measure of the fluctuation in the market price of the underlying security.
Mathematically, volatility is the annualized standard deviation of returns.
Intrinsic Value
The
greater of the following: the difference between the stock price and the strike
price, or zero (if the difference between the stock price and the strike price
is negative).
Black-Scholes Model
The
Black & Scholes option model is an option valuation model. The fair value of an
option can be estimated by using this valuation model. Professionals and
academics extensively use it since it was published in the 70s.
Option Exchanges
Options on Stocks are traded in option exchanges, usually with expirations of 2
years and less.
American-style option
An
option that may be exercised at any time between the date of grant and the
expiration date.
Premium
The
price of an option, which the buyer of the option pays to the option writer for,
the rights conveyed by the option contract.
Strike price
See
Exercise Price
Underlying security
The
security subject to being purchased or sold upon exercise of the option
contract.
Writer
The seller of an option contract
Initial Public Offering
(IPO)
The first time a company offers its stock for sale to the public.
Long Term Gain
A
gain on the sale of securities or other capital assets where the holding
period was 12 months or more
Reprising
Reprising of stock options means changing the existing exercise price of the
option to a different price. The company generally does this when the stock
price has dropped due to market conditions and hence the stock price is lower
than the exercise price.
Restricted Stock
Stock issued to employees with the agreement that they will own the stock only
if certain goals are achieved.
Short Term Gain
The
gain on the sale of securities or other capital assets where the holding period
was less than twelve months.
Stock Option Plan
A
document outlining the rules under which stock options are granted.
Stock Swap
The
exercise of stock options where the value of currently owned shares are used to
pay the exercise price.
Stock Appreciation Rights
(SARs)
The
right to receive the appreciation value (the spread between the market price at
exercise and grant price) of a certain number of shares of the company over a
specific period of time in cash, company stock, or some combination of the two.
Under-Water Option
An
option whose exercise price is more than the current stock price.
Warrant
A
stock market security with a market price of its own that can be converted to a
specific share at a predetermined price and date.
Early exercise
The
early exercise program permits exercise of stock options immediately after grant
rather than waiting for any vesting period. However the stock issued on exercise
is restricted and is subject to a vesting schedule.
Accelerated Vesting
This provision, if included in the plan, allows acceleration in vesting of the
stock options. This acceleration will occur only when the conditions mentioned
are met with.
Time-based vesting schedules
The
vesting schedules in which the vesting of options is tied to the length of
service requirements.
Graded vesting
In
this type of vesting, a portion of the options granted to the employees vest
each year they stay with the company following the grant.
Cliff vesting
In
this type of vesting, the employee gains no right to his grant until he has
stayed with the company for the full specified period at which time the options
become 100% vested.
Performance based vesting
schedules
The
vesting schedules in which the vesting of options is tied to the achievement of
certain performance goals.
Time to expiry
The
time remaining for the expiration of the option
