Get Rich on Stock Options

The following example shows how stock options are granted and exercised:

1. ABC, Inc. hires employee John Smith.
   
2. As part of his employment package, ABC grants John options to acquire 40,000 shares of ABC's common stock at 25¢ per share (the fair market value at the time of grant).
   
3. The options are subject to a four-year, yearly vesting, which means that John has to stay employed with ABC for one year before he gets the right to exercise 10,000 of the shares, another year for the second 10,000 shares, and so on.
   
4. If John leaves ABC or is fired before the end of his first year, he doesn't get any of the options.
   
5. After his shares are "vested" (become exercisable), he has the option to buy the stock at 25¢ per share, even if the share value has gone up dramatically.
   
6. After four years, all 40,000 of his option shares are vested if he has continued to work for ABC.
   
7. ABC becomes successful and goes public. Its stock trades at $20 per share.
   
8. John exercises his options, and buys 40,000 shares for $10,000 ($40,000 x 25¢).
   
9. John turns around and sells all 40,000 shares for $800,000 (40,000 times the $20 per share price), making a nice profit of $790,000.