Companies often offer stock options to employees. Where does the stock in these options come from?
Companies generally create more stock by asking shareholders to authorize an increase in the number of shares outstanding. Frequently, the company will specify that a certain number of new shares will be held for employee stock option grants. Once they get the OK, new options will be minted as needed. Sometimes the company repurchases some of its own publicly traded shares to offset any dilution caused by this increase in the number of shares outstanding.
In the last few years, stock options have come under scrutiny for the role they play in misaligning executive interests with those of long-term shareholders, and for the way that their use has distorted earnings. Learn more in these Fool articles on the topic: