Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Grant

What it is:

In the business world, a grant usually refers to a stock option grant. However, the term can also refer to federal funding for research, business ventures or partnerships.

How it works (Example):

Let's assume that John Doe receives options to buy 2,000 shares of Company XYZ, his employer, for $10 a share. He receives the option grant as part of his compensation package. His shares vest over a five-year period, meaning they do not become exercisable for five years.

Accordingly, if Company ABC comes along and buys a 51% stake in Company XYZ and John Doe's options automatically vest, John could exercise his options at $10 a share, sell the shares for $20 a share, and walk away with a tidy profit.

Why it Matters:

Option grants are incentive compensation that encourage employees to do work that increases the stock price and thus shareholder value, which is the primary objective of all businesses. A company's board of directors normally must approve option grants.