<p>An Employee Stock Option (ESO) is a form of compensation that gives employees the right, but not the obligation, to buy their company's stock at a predetermined price within a specified time frame.</p>

<h2>How It Works</h2>
<p>ESOs are typically granted at no cost to the employee, with the strike price (exercise price) set at the stock's fair market value on the grant date. Here's how they work:</p>
<ul>
  <li><strong>Grant:</strong> The company's board of directors or compensation committee grants ESOs to employees.</li>
  <li><strong>Vesting:</strong> ESOs vest over time, usually in increments over a period of 3 to 5 years. Employees can only exercise (buy) the vested options.</li>
  <li><strong>Exercise:</strong> Once vested, employees can choose to exercise their options, buying the company's stock at the strike price. If the stock's market price is higher than the strike price, the employee makes a profit.</li>
</ul>

<h2>Why It Matters</h2>
<p>ESOs matter for several reasons:</p>
<ul>
  <li><strong>Alignment of Interests:</strong> ESOs align employees' interests with those of shareholders. Employees benefit when the company's stock price increases.</li>
  <li><strong>Retention and Motivation:</strong> ESOs can help retain and motivate employees, as they have a direct stake in the company's success. They also provide a tax-advantaged form of compensation.</li>
  <li><strong>Dilution:</strong> While ESOs can benefit employees, they can also dilute existing shareholders' ownership and potentially reduce the value of their shares. It's crucial for companies to balance the use of ESOs with other forms of compensation.</li>
</ul>