What is a Grant?

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 Does a Grant Work?

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 Does a Grant Matter?

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.