Stock 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
In the room
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.