For decades, companies have used stock options to tie the personal wealth of executives and employees to the performance of the company. Essentially, the more valuable the company becomes, the more valuable its stock options are.
It works like this: Options give you the right to buy (or “exercise”) a certain amount of stock at a set price over a specific time period. That price is generally whatever the stock was worth when you received the option. If the stock price goes up, you can buy it cheaper by exercising your option, then sell the shares and pocket the difference. If the stock drops, you miss out on the payoff.
Options usually vest over time—the longer you work, the more you accumulate.
Large public companies often give options to employees, but so do startups that hope to be bought or go public someday. Sometimes they’re offered instead of salary, figuring they’ll be worth far more if—a big if—the company strikes it big. (Think Google.)
So how can you get in on the action?