Grant

Legally binding agreement of terms for your options

Vesting

Gradually gives you access to your options

Exercise

The act of purchasing your actual stock

Sale

The act of selling your stock

Grant date: date when your grant begins

Post-termination period: window when you can still buy after you leave (usually 90 days, more for death, etc.)

Expiration date: date when you can no longer buy your options (usually 10 years after grant date)

Strike/exercise price: the price you pay for your shares (usually 'fair market value' on the grant date)

Quantity: number of shares you can buy when fully vested

# of shares  x  strike price  =  cost basis

# of shares  x  (current fair market value  -  strike price)  =

1000    x     $0.10     =    $100

1000   x    (             $1.00           -     $0.10 )   =   

Spread

$900

# of shares  x  current market price  =  gross proceeds

gross proceeds  -  cost basis  =  net proceeds

  1000      x          $2.00           =     $2000

  $2000      -    $100    =   $1900*

* $900 of this is the spread

Restricted stock award: actual stock granted to you, with no purchase required (granted and transferred all at once, but control is usually vested)

ISOs (incentive stock options): options with special tax benefits (only available to employees)

NSOs (nonstatutory stock options): options where the spread is taxed as ordinary income at exercise (usually used for contractors)

RSUs (restricted stock units): "units" of stock (or cash value of stock) given to you over a vesting schedule

Cost basis = 1000 x $0.10 = $100

Spread = 1000 x ($2 - $0.10) = $1900

Gross proceeds = 1000 x $2 = $2000

Net proceeds = $2000 - $100 = $1900

Net proceeds = Spread = $1900 ordinary income

Cost basis = 1000 x $0.10 = $100

Spread = 1000 x ($1 - $0.10) = $900

Gross proceeds = 1000 x $2 = $2000

Net proceeds = $2000 - $100 = $1900

Tax calculations depend on how long you hold

Hold for less than 1 year

Spread = $900 taxable as income

Net proceeds - Spread = $1000 short-term capital gains*

*taxed at the same rate as ordinary income

Hold for more than 1 year

Spread = $900 taxable as income

Net proceeds - Spread = $1000 long-term capital gains

If your total income is high enough, Net Investment Income Tax may also apply.

ALL net proceeds = $1900 long-term capital gains

Hold for more than 1 year

... and 2 years after grant

It varies widely by situation! You can use calculators to estimate, but talk to an expert before making a move.

Cost basis = 1000 x $0.10 = $100

Spread = 1000 x ($1 - $0.10) = $900

Can't sell until there's an exit:

Lots of upfront cost that may never pay off

acquisition ~ or ~ IPO

10,000 shares     Strike price $0.10    Exercise price $5

Cost basis = 10,000 x $0.10 = $1000

Spread = 10,000 x ($5 - $0.10) =

$49,000

taxable "income"

...but again, it's complicated,

so talk to an expert!

Termination (voluntary or involuntary)

Quit/fire/layoff is usually 90 days
(but some are offering much longer)
 

Death or disability may have a longer window
(like 12-18 months)

Expiration

10 years after grant date

Tender offer  ('buy back')

Company may offer an event allowing
shareholders to sell a potion of their shares

Secondary 'sale' services

Third-party companies offer loan-like instruments
for buying and selling options

Examples (not endorsements!): ESO Fund, EquityZen, Equitybee

(Be aware that this may also vary widely,

especially in early stage companies)

Dilution
Your option/share count stays the same, but your percentage will decrease as more investors join

This can mean that if the company sells for $100M

but raised $100M, your shares are worth $0

Preferred Shares

Investors typically have preferred shares, which usually includes liquidation preference, which means investors get back what they put in, first.

How likely is this to happen? How long will it take?

(Be sure to consider future funding in your calculations.)

Find similar companies to compare.

Early exercise

Buy shares before  vesting to eliminate the bargain element 

10,000 shares     Strike price $0.10    Exercise price $0.10

Cost basis = 10,000 x $0.10 = $1000

Spread = 10,000 x ($0.10 - $0.10) = $0

Restricted Stock Award (not RSUs!)

Similar benefits, except there's no purchase price - you're given the stock outright (and taxed as income)

(In both cases, you'll lose unvested shares if you leave early)

may also get Qualified Small Business Stock benefits

Extended exercise period

Keep your options for years after you leave, so you can wait for an exit. Some may scoff, but companies are doing it.

Follow-on stock grants

See if the company has a policy for granting more stock over time, to curb dilution and get options with later expiration.

Accelerated vesting on acquisition

Avoid losing unvested options if the company is acquired (single-trigger) and lays you off (double-trigger).

Get your grant

This is not your offer letter! It may be months before you get it, especially in a new startup. Try to ensure you get it before the company's valuation goes up.

Look before you leap

Before exercising options (especially buy & hold), make sure you know the tax implications. Get professional help!

Check for take-backs

Ask if the company has the right to repurchase vested shares. This can hurt (or sometimes help) you.

Money isn't everything

And stock options may never be money! Remember there are many reasons to join a company.

Satisfaction is perception

Wondering if you could have negotiated a better deal will not bring you more money or happiness. Celebrate what you achieved and move on!

(and new funding rounds are a great time to renegotiate!)