Deal Terms
Stock Option
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Quick Answer
The right to purchase company stock at a fixed price (strike price) in the future — the primary equity compensation tool for startup employees.
A stock option gives the holder the right (but not obligation) to purchase a specified number of company shares at a predetermined strike price within a defined time period. Options are the primary equity compensation tool for startup employees because they require no upfront purchase — employees wait until exercise is advantageous (when shares are worth more than the strike price). Types: Incentive Stock Options (ISOs) receive preferential tax treatment (capital gains at exercise, potential AMT trigger) and can only be issued to employees; Non-Qualified Stock Options (NSOs/NQSOs) are taxed as ordinary income at exercise and can be issued to advisors and consultants. Options expire (typically 10 years from grant, or 90 days after leaving the company — though many startups now offer extended exercise windows). The option expiration after leaving is a critical, often overlooked employment term.
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Further Reading
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What Happens at a Startup Board Meeting: Agenda, Dynamics, and Preparation
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How to Calculate Dilution: The Founder's Equity Formula
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The Founder's Guide to Understanding Your Cap Table
Everything founders need to know about cap tables — who's on it, how dilution works across rounds, option pool mechanics, and common mistakes that cost founders millions.
What Happens During a Down Round: A Step-by-Step Breakdown
A down round isn't just a bad headline — it's a complex legal and financial event with real consequences for founders, employees, and investors. Here's exactly what happens, step by step.
How a Series A Actually Works: From First Meeting to Wire Transfer
The Series A process is opaque, exhausting, and often takes three to six months. Here's exactly what happens at every stage — from the first intro email to the moment the money hits your account.
Frequently Asked Questions
What is Stock Option in venture capital?
A stock option gives the holder the right (but not obligation) to purchase a specified number of company shares at a predetermined strike price within a defined time period.
Why is Stock Option important for startups?
Understanding Stock Option is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
What category does Stock Option fall under in VC?
Stock Option falls under the deal-terms category in venture capital. This area covers concepts related to the financial and legal terms that define investment agreements.
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