The exercise price is often determined by the most recent 409A valuation (if the company is private). In our case, Alex would be able to purchase 5k shares of Startup X at $5/share. The exercise price-also called the strike price-is the price at which the option holder can purchase the underlying shares. His stock options have a four-year vesting period (with a one-year cliff) and a 10-year exercise window from the grant date. As part of his offer, Alex receives a grant for 5k stock options, each with an exercise price of $5/share. Suppose hypothetical employee Alex takes a job at Startup X. In this article, we’ll break down how employee stock options work, the different types of employee stock options, and their respective tax implications. Employees with stock options can share in the financial benefit if and when a startup has a liquidity event. Startups like offering stock options because they align employee incentives with those of the company, while reducing cash burn rate (as stock options often allow companies to offer a lower base compensation). In the startup world, employee stock options have become a standard part of compensation packages. The shares allocated for these options come from the employee option pool. Other common forms of equity compensation include Restricted Stock Units and Employee Stock Purchase Plans.Įmployee stock option grants are financial instruments that grant the recipient the right (though not the obligation) to purchase a predetermined amount of a company’s shares at a predetermined price, at a predetermined time.The primary difference between the two is tax treatment. There are two main types of employee stock options-incentive stock options and non-incentive stock options.Employee stock options provide their recipients the right to buy a specific amount of a company’s shares at a specific price at some point in the future.Quotes included in these materials related to AngelList's services should not be construed in anyway as an endorsement of AngelList's advice, analysis, or other service rendered to its clients.
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