Do Employee Stock Options Create Company Debt?
Employee stock options are issued by many companies as incentives to employees. These options do not create company debt. Understanding the difference between debt and equity is the key to understanding employee stock options.
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Employee Stock Options
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Employee stock options are contracts issued to employees enabling them to buy company stock at a set price. There is also a designated time period in which the options may be used called the exercise period. The option's strike price is the price at which the option holder may buy stock.
Equity vs. Debt
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Companies raise money either by issuing equity or taking on debt. When taking on debt, a company doesn't lose any equity, but it must pay back the debt with added interest. The other option is to issue equity by offering shares for sale in a public market. In return for transferring a portion of company equity over to public ownership, the company receives capital from the sale of shares. Just as a company may issue shares on a public market, it may also offer stock options to employees.
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Purpose
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The purpose of employee stock options is to attract and motivate employees. In the hiring process, the benefit of stock options is helpful in attracting skilled employees. Also, stock options give employees an added interest in company performance because they allow employees to directly benefit from rising company values.
Option Profits
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Profits from employee stock options do not create company debt. When company shares are exchanged, profits and losses are incurred by buyers and sellers only. The only time a company receives money for shares is during an Initial Public Offering, called IPO, and the only time a company pays to buy its own shares is during a buyback where the company is taking shares back from the market.
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