A right to buy shares later at a fixed price (the strike price). Options typically vest over four years with a one-year cliff. Common for employees; you don't own shares until you exercise.
Why it matters
Stock options are the primary tool for equity compensation beyond the founding team. Understanding how they work is essential whether you're granting them or receiving them. The difference between ISOs and NSOs, and knowing when to exercise, can mean thousands of dollars in tax savings.
How it works
A stock option gives you the right to buy a specific number of shares at a fixed price (the strike price) set at the time of grant. Options typically vest over four years with a one-year cliff. There are two types: ISOs (Incentive Stock Options) get favorable tax treatment but are only for employees. NSOs (Non-Qualified Stock Options) can go to anyone but are taxed as ordinary income on exercise. You don't own any shares until you exercise, which means paying the strike price. If you leave the company, you typically have 90 days to exercise vested options or they expire.
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