An employee stock option is a contractual right to buy company stock later at a specified price and under specified conditions. For a startup competing with larger employers, generous options can add upside to an offer. section 21.4.1 section 21.4.2
Do not judge a grant by its option count alone. Examine:
- Percentage ownership: 10,000 options mean very different things depending on the company’s total outstanding shares. section 21.4.2
- Vesting schedule: a typical four-year schedule with a one-year cliff grants the first quarter after one year, then 1/36 monthly. section 21.4.2
- Expiration date: unexercised options disappear when the grant expires and return to the company’s available option pool. section 21.4.2
- Strike price: the amount paid to exercise each option and turn it into a real share. section 21.4.2
- Other terms: check change-of-control protection and the timing and details of the next financing round. section 21.4.2
The uncomfortable deadline
Vesting rewards staying long enough to earn more rights, but leaving can sharply reduce the value. Departing employees usually have only a small window—often 90 days—to exercise vested options. If exercised shares are sold after less than a year, the profit is treated as income for U.S. tax purposes. section 4.2
Vesting means that the right to purchase stock becomes unconditional over time; unvested rights are forfeited when employment ends. During a layoff, the employee’s packet should explain what happens to the options. section 4.2 section 29.2.3
