Stock Option
The right to purchase company shares at a fixed strike price, typically granted to employees as compensation and earned through vesting.
A stock option grants the right, not the obligation, to buy a set number of company shares at a predetermined strike price (usually set at the current 409A fair market value at grant), typically becoming exercisable as the underlying grant vests over time. The value to the holder comes from the spread between the strike price and the share's actual value at the time of exercise or sale.
Options only have value if the company's share price rises above the strike price — if the company's value falls below the strike price ('underwater' options), the options are effectively worthless unless the strike price is repriced, which is a common issue after a down round.
Options decide how much upside employees actually keep, and the details punish the uninformed: incentive stock options carry an annual $100,000 limit, past which the excess is treated as non-qualified options (the ISO vs. NSO entry has the details).
Departure is where value gets lost. Many option agreements give departing employees a short window — often about three months — to exercise vested options, and employees who can't afford the exercise cost plus taxes forfeit them. Unvested options are forfeited at departure regardless.
Exercising incentive stock options can also trigger the alternative minimum tax in the exercise year, even if no shares are sold. '10,000 options' can mean anything from a life-changing payout to a tax bill paid out of pocket, which is why it's worth modeling exercise cost, AMT, and the post-termination window before you need to decide.
Option value at exercise = (fair market value per share - strike price) x number of shares exercisedAn employee is granted 10,000 options with a $2.00 strike price. When the company is later acquired at $9.00 per share, the employee's options are worth (9.00 - 2.00) x 10,000 = $70,000 before tax, minus the cost to exercise.
Give new employees a plain-English explanation of strike price, exercise windows, and tax treatment at grant — most people joining an early-stage startup significantly overestimate or underestimate what their options are actually worth without this context, which affects both retention and trust.
What does it mean for stock options to be underwater?
It means the current fair market value of the stock has fallen below the option's strike price, making the option worthless to exercise unless the company repriced the strike or the value later recovers.
How long do I have to exercise options after leaving a startup?
Whatever your plan and grant agreement say, and some companies offer much longer windows than others. Read it before you resign: exercising takes cash, and ISOs have their own tax deadline, explained in the ISO vs. NSO entry.
Can ISOs trigger a tax bill even if I don't sell the shares?
Yes, through the alternative minimum tax, which can bite in the year you exercise. The ISO vs. NSO entry explains how the spread is treated and why to model it first.
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Related terms
Run the numbers yourself: dilution, SAFE conversion, and fund-returner calculators.