Deal Terms
Stock Options
The right to purchase company shares at a fixed price (the strike price) granted to employees and service providers as part of equity compensation.
Stock options give employees the right to buy company shares at a fixed price — the strike or exercise price — typically set at the fair market value on the grant date (the 409A valuation for private companies). Options don't grant ownership immediately; they vest over time according to a vesting schedule, commonly four years with a one-year cliff.
There are two primary types: Incentive Stock Options (ISOs), which are only available to employees and have favorable tax treatment if held long enough, and Non-Qualified Stock Options (NSOs or NQSOs), which can be granted to anyone but are taxed as ordinary income upon exercise. Options must be exercised — meaning the employee pays the strike price — typically within 90 days of leaving the company, or they expire.
In Practice
An engineer joins a startup with a grant of 10,000 options at a $1 strike price. After four years of vesting, they exercise all options, paying $10,000. If the company later exits at $20/share, those shares are worth $200,000 — a $190,000 gain.
Why It Matters
Stock options are the primary way startups attract and retain talent without paying market salaries. Understanding vesting schedules, strike prices, and the 90-day exercise window is critical for employees evaluating startup offers. Many employees forfeit options by leaving before the cliff or failing to exercise within the window.