Glossary

Black-Scholes - Refers to the option pricing model developed by Fischer Black and Myron Scholes to determine the current value of certain types of options. It is widely used by investors to determine prices of publicly traded options and by companies for financial statement purposes in estimating the current compensation value of employee stock options when they are granted.

Cashless Exercise - Exercising your options without paying the exercise cost in cash from your personal funds. The brokerage company facilitating the exercise loans you the necessary funds and shares of stock are sold immediately upon exercise to repay the loan.

Clawback - A company's right to reach back and recover any profits you have made as a result of your stock options. Usually invoked when a "Non-Compete Clause" has been violated.

Critical Capital™ - The amount of money or capital you need to be financially free from the need to work for the rest of your life. (See Lesson 5: Critical Capital.)

Exchange - Paying the exercise cost by using ("exchanging") shares of company stock that you already own, instead of paying cash or using a cashless exercise.

Expiration Date - The date on which your option agreement expires. You must exercise your options before the expiration date.

Grant - When your company gives or "grants" options to you, it documents that "grant" with a written agreement which spells out all of the specifics, the terms and conditions of your options. All options which are created by one agreement are referred to as a grant. You may have multiple grants, each with different terms and conditions, if your company has granted you options on more than one occasion.

Grant Agreement - see Option Agreement.

In the Money - When the market price of your options is more than your exercise price, you are "in the money." Thus if your grant gives you the right to buy a share at $10 and the market price is $15, you are $5 "in the money."

Incentive Stock Options (ISOs) - Options that are granted special tax treatment if certain conditions are met.

Leverage - see Lesson 3: Leverage.

Non-Compete Clause - A clause in the option or grant agreement providing for option profits to be returned to the company if you leave the company and go to work for a competitor within a specified period of time.

Non-qualified Stock Options (NQSOs or NSO) - Any options which are not Incentive Stock Options (ISOs).

Option Agreement - The actual document which creates your options, it specifies all of the terms and conditions of your options. It is also referred to as a "Grant Agreement" or "Stock Option Agreement."

Publicly Traded Options - Contracts granting the owner the right to buy or sell stock at a specified price within a specified time period or on a specified date. Unlike employee stock options, these options are freely transferable and are actively traded on public stock and option exchanges.

Qualified Stock Options - Another name for Incentive Stock Options.

Reload Options - Options where the agreement provides for new options to be automatically issued (reloaded) when you exercise your options under certain circumstances. Those circumstances usually being using existing shares (rather than cash) to exercise options.

Repricing - Modifying the exercise price of already issued options. If the price of the stock has dropped to a level making options worthless, a company may lower the exercise price in order to increase the value of the options and the morale of the employees.

Reverse Split - When a company issues new stock to shareholders, issuing fewer new shares in exchange for the old shares. For example, in a 1-for-2 reverse split, each shareholder would receive one share of new stock for every two shares owned before the split. Market price of the stock and the exercise price are adjusted accordingly. The inverse of a normal Stock Split.

Spread - The difference between the exercise price or cost of the options and the market price of the stock.

Stock Split or Split - A company "splits" its stock by issuing new shares of stock in a fixed ratio to existing shareholders. When a split occurs, the price of each share of stock is adjusted accordingly and the exercise cost of options is also usually adjusted.. In a 2-for-1 split, for example, each shareholder will receive two new shares of stock for every one she owned before the split. If the price of the stock was $100 per share before the split, the price would be $50 per share after the split. Likewise, if the exercise price of an option was $10 per share before, it would be $5 per share after the split.

Term - The time period you have to exercise your option. The term ends on the expiration date. If you haven't exercised your options by the end of the term, you will lose them.

Underwater - If the market price of your options is less than the exercise price then your options are "underwater."

Vesting - Refers to a process where your rights become effective over time. An option is "vested" when you have the right to exercise it.s