Stock Options
Also called Employee Stock Options · ESOs · Options
Stock Options give an investor or employee the right to purchase shares of a company at a pre-determined strike price.
Example
Let’s say you work at FacelessFlowers and have been given 10 stock options at an exercise price of $5 per share.
Now, FacelessFlowers gets ready to IPO at a price of $10 per share. You would have to purchase the options and sell the shares to receive the proceeds:
Execution of Options = $5 (exercise price) * 10 (# of options) = $50
Proceeds from Selling Shares = $10 (IPO price) * 10 (# of purchased shares) = $100
Net Profit to You = $100 - $50 = $50
Why Stock Options matters in investment banking interviews
Options matter for share count and dilution, which is why they show up in equity value calculations. Know the treasury stock method exists and roughly what it does — it's a common follow-up once options come up.