Someone explain stock options to me

Particularly if the options are granted prior to the company becoming publicly traded.

Just PM Animo.

google.com "explain stock options"

I don't really know, but I just assumed it meant you get a certain amount of stock

then if the company goes public, you can sell that stock and profit

google.com "explain stock options"
Particularly if the options are granted prior to the company becoming publicly traded.
Thanks.

u get the 'option' of taking some payment in the form of 'stock'

then u do whatever it is you do with stocks (keep them or sell them) at the appropriate time (always debatable)

Stock options are essentially the right to buy a certain amount of stock at a preset price.
They can be granted by a company to their employees or traded on various options exchanges.
If you buy them on the exchanges you pay a premium as you are locked in at a prices. Options derive their value from the stock price, and become more valuable if the stock price is greater than the buy in price of the option, because you could immediatly exercise your option and then sell right away for a profit.
Options also have expiration dates and they loose value as they approach that date. The closer to the expiration date, the more volatile they get, the farther away the less.
I'm not so sure about company granted stock options (I believe they either have no expiration date, or are very far out).

Edit: You can also sell options on stock you own, which is known as a covered call. So if you own 100 shares of Apple you could sell an option at a set price. If the stock is above that price on the expiration of the option, you get "called" on your options and sell your stock at the arranged price. If the stock is below it, nobody will want to exercise the option and you hold onto your stock.
Anyone who holds shares (in 100's) of stock can sell options as long as options can be traded on that stock.

I know what an option is, and how it works.

What I do not understand is how options work if the company is still private. Say I am given stock options in a private company. Are they valueless unless the company becomes public and begins trading?

stock options are mostly puts and calls

Puts - the right to sell a stock at a certain price, before an expiration date

Calls - the right to buy a stock at a certain price, before an expiration date

employee stock options are these puts and calls on the company's own stock

I know what an option is, and how it works.

What I do not understand is how options work if the company is still private. Say I am given stock options in a private company. Are they valueless unless the company becomes public and begins trading?
I guess that depends on what you mean as private. Is it a solely owned business, or a corporation or a a parternship?

I imagine if it is a corporation you can exercise your options without being a publically traded company, as stock still exists.

Edit: Google: http://experts.about.com/q/Venture-Capital-Stock-1832/stock-options-privately-held.htm

how do you set the prices of the underlying shares if its not on the market?

Privately held stock is valued solely on profit per share (not speculation) and it is usually a formula determined by your revenue agency.

Basically, profit / # of shares.

http://museum.msu.edu/museum/tes/livestock.jpg

so basically the options are profit sharing. if the company makes $X/share over his option price, then he gets a bonus of # of shares in option * $X - option price.

Okay, that's pretty much what I figured.

The company is supposed to go public in < 1 year. Whether that happens or not depends on whether we meet projections in sales and development goals.

I wanted to know if these options are worth anything if that doesn't happen at that time.

The company is incorporated, and mainly funded by one of the larger hedge funds (whose founder is our titular President, although he has little to do with day-to-day operations).