An employee share option is the right to acquire shares in a company (usually the employing company or a member of its corporate group) at a pre-set price, known as the 'exercise price'.
For example, an employee may have an option to buy 100 shares at a price of £1 per share.
Normally, the exercise price is the market value of the shares at the time the option is granted. An option to acquire shares for nothing is known as a 'nil-cost option'.
Employee share options can be very valuable. If the share price rises above the exercise price, the employee can make a profit by exercising the option and selling the shares. In essence, a share option means that an employee can buy a share for less than it is worth at the time of exercise.
Some employee share schemes are drafted so that the participants in the scheme are entitled to an increasing number of options over a certain period of time or upon the achievement of certain targets (commonly referred to as the options 'vesting'). The exercise of the option (ie the point at which the option can be used to acquire shares) may also be linked to the occurrence of particular events or the achievement of agreed targets.