The right to purchase stock at a given price at some time in the future. The company does not receive a tax deduction for this type of option. The company may receive a tax deduction on the 'spread'. If the underlying stock increases in value, the option becomes more valuable. If the underlying stock decreases below the 'grant' price or stays the same in value as the 'grant' price, then the option becomes worthless.
Advantages Allows a company to share ownership with the employees.
Appropriate for small companies where future growth is expected. For publicly owned companies who want to offer some degree of company ownership to employees. How much stock a company be willing to sell. Who will receive the options. How many options are available to be sold in the future.