A
corporation may grant someone the option to purchase a set number of shares of the corporation's
stock at a price (the "
strike price") fixed at or around the time the option is granted. The shares are set aside until a later date when the grantee may
exercise the option to buy the shares--this event is called vesting. Options may vest all at once, or an option on part of the shares may vest periodically. The shares may be bought and held, like shares purchased through a
stock exchange, or they may be immediately sold, hopefully for a
profit.
Many companies grant employees stock options as an incentive to stay with the company for the whole vesting period, and to work hard to promote the company's success, increasing the value of the company and thus the price of its stock. This incentive is lost on employees of privately-held corporations, since it is nearly impossible to sell shares of stock purchased through these options. But they can be very enticing to employees of a publically-traded corporation, as the difference between the stock price and the strike price can reflect a substantial profit.