Reload Option

What Is a Reload Option?

A reload option is a type of employee compensation wherein extra stock options (ESO) are granted upon the exercise of the recently issued options.

Reload options are highlights which, as opposed to paying the employee in cash, after being exercised the employee is compensated in shares of the company's stock. The exercise price of the recently granted (reloaded) option is set to the market price of the shares on the date the reload option is granted.

How a Reload Option Works

Employee stock options (ESOs) are a type of equity compensation granted by companies to their employees and executives. As opposed to granting shares of stock straightforwardly, the company gives derivative options on the stock all things considered. These options come as ordinary call options and give the employee the right to buy the company's stock at a predefined price for a finite period of time. Terms and conditions of ESOs will be fully explained for an employee in an employee stock options agreement.

A reload option is a stock-for-stock option granted to employees of a firm. For instance, an employee who is granted a reload stock option with a term of 10 years however who exercises the option after just six years might be granted a reload option for shares with a term of four years. The new grant is typically for similar number of years as the underlying option. Instead of concocting the money required to pay for the shares of the underlying option, the employee is given another option that has intrinsic value.

A stock-for-stock option is a method utilized in giving ESOs that fulfills the option price in an employee stock option compensation scheme. Under these compensation programs, employees are granted stock options - however they must pay the company the price of the option before they are given the grant

By trading mature stock (stock that has been held for a required holding period), the employee can then receive their options without paying for them. After a given time span, employees are given back the stock they used to pay for their options. Firms that grant ESOs like the advantage of a stock-for-stock exchange, since they require no cash outlay.

Illustration of a Reload Option

For instance, a company CEO, Dave, has been granted a reload option. Every option contract gives Dave the right to purchase 1,000 shares of his company's stock at $25 each. In the event that the stock price goes up to $40, Dave could exercise by conveying 625 shares (worth $15,625 at $25 each) and getting 375 shares (worth $15,000 at $40 each).

Keep in mind, this is the stock-for-stock option scheme. Dave would then receive another option to purchase the leftover 625 shares for $40 (this is the reload). One way or the other, Dave will in any case gain or lose on the full 1,000 shares, yet he is better off since his total outlay for the option is currently just $625 ($15,625 - $15,000) rather than $25,000 (1,000 x $25).

Features

• The reloaded options grant is typically in a similar amount and term as the original grant.
• A reload option permits an employee can be granted more employee stock options (ESOs) when they exercise as of now accessible ESOs.
• The reload option involves a stock-for-stock option that resigns mature shares, which can extraordinarily bring down the cost to employees.