Full Definition
Stock options give employees the right to purchase a specified number of company shares at a predetermined price (the "strike price" or "exercise price"), typically set at the fair market value on the grant date. They're a key component of startup compensation packages.
Types of Stock Options
- ISOs (Incentive Stock Options): Tax-advantaged options for employees only, with favorable long-term capital gains treatment
- NSOs (Non-Qualified Stock Options): Available to employees, advisors, and contractors; taxed as ordinary income upon exercise
Key Terms
- Strike Price: The price at which you can buy shares (set at grant)
- Vesting: The schedule on which options become exercisable
- Exercise: Actually purchasing the shares by paying the strike price
- Post-termination exercise period: Time to exercise after leaving (typically 90 days)
Real-World Example
An early engineer receives 50,000 stock options with a $0.10 strike price. If the company goes public at $20/share, each option is worth $19.90 in profit.
Related Terms
A reserved percentage of shares set aside for future employee stock options and equity grants.
The process by which an employee or founder earns their equity over time based on continued service.
A minimum service period before any equity vests, typically one year in startup equity agreements.
Ownership interest in a company, represented by shares of stock.
An independent appraisal of a private company's fair market value, required for setting stock option exercise prices.
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