Unveiling the Power of Employee Stock Options

Employee stock options (ESOs) are a powerful tool for companies to attract, retain, and motivate top talent. However, they can also be a source of confusion and misunderstanding for both employees and investors. In this article, we'll explore three must-knows about employee stock options to help you better understand their impact on earnings per share (EPS), the price-to-earnings (P/E) ratio, and the overall valuation of a company.

1. Understanding the Dilution Effect of ESOs on EPS
Employee stock options can have a significant impact on a company's earnings per share (EPS) through dilution. When employees exercise their options, the company issues new shares, which increases the number of shares outstanding. This dilution reduces EPS by spreading the same earnings over more shares. For example, if a company with 10 million shares outstanding and EPS of $2 per share issues 1 million new shares through the exercise of ESOs, the new EPS would be $1.67, making the company appear less profitable on a per-share basis.