Deal Terms
Stock Options
Last updated
Quick Answer
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.
Related Concepts
Further Reading
VC Term Sheet Template & Guide: Every Clause Explained with Examples
A clause-by-clause breakdown of every standard VC term sheet provision — what each term means, what's market, what to negotiate, and the red flags that cost founders millions.
How Secondary Sales Work for Startup Employees: Selling Your Shares Before an IPO
Your startup equity doesn't have to be locked up until an IPO or acquisition. Secondary markets let employees sell shares early — but the process is complex, company approval is usually required, and the tax implications are significant.
What Happens at a Startup Board Meeting: Agenda, Dynamics, and Preparation
Board meetings are where a startup's most consequential decisions get made — or avoided. Here's what actually happens in the room, who attends, and how to run one well.
How to Calculate Dilution: The Founder's Equity Formula
Every funding round dilutes your ownership. Learn how to calculate dilution, model cap table scenarios, and understand what post-money ownership actually means for founders.
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.
Comparisons
Frequently Asked Questions
What is Stock Options in venture capital?
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).
Why is Stock Options important for startups?
Understanding Stock Options 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 Options fall under in VC?
Stock Options 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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