In the context of an employee stock option plan (ESOP), ‘exercise’ refers to the act of exercising one’s right to purchase the shares of the company where one is an employee.

When an employee fulfills the vesting conditions stipulated in the ESOP, the options ‘vest’ and they can convert the options to shares by exercising their right to buy the shares. Once options are exercised, the employee becomes a shareholder in the company.

All options come with an exercise period within which the employee must exercise their right. Once the options vest, the option holder may at any time during the exercise period submit an application (exercise letter) to the board of directors, for allotment of shares. If options are not exercised during the exercise period, they automatically lapse.