Legal Definitions - incentive stock option

Definition: An incentive stock option is a type of stock option that is granted to employees as a form of compensation. It allows employees to purchase company stock at a discounted price, usually at the current market value, and hold onto it for a certain period of time before selling it for a profit.

Example: Company XYZ grants John, one of its employees, an incentive stock option to purchase 1,000 shares of company stock at $10 per share. The current market value of the stock is $15 per share. John exercises his option and purchases the shares for $10,000. He holds onto the shares for two years before selling them for $20,000, making a profit of $10,000.

Explanation: In this example, John is granted an incentive stock option as a form of compensation for his work at Company XYZ. He is able to purchase the company's stock at a discounted price and hold onto it for a certain period of time before selling it for a profit. This allows John to benefit from the success of the company and incentivizes him to work hard to improve the company's performance.