Equity 101 : A quick guide to understanding startup stock options

This article will give a high level overview of stock options: what they are, how you get them, and some information you need to know!

Startup companies may offer stock options as part of their compensation package. This is a way to attract and retain the best talent for the company. Stock options give you the right to purchase shares of the company's common stock at a fixed price.

There are two types of options, Incentive Stock Options (ISO) and Non-Qualified Stock Options (NQO)– the main differences being tax related, as such, ISOs can only be granted to employees. Companies may also offer restricted stock which is treated differently and requires an up front purchase of the shares. This blog post goes into more detail about the differences between these equity types. 

I have been offered stock options, what does this mean? 

When an employee is granted options, they are given a contractual right to purchase shares in the company in the future. When that happens, a Stock Option Agreement is created and signed by both parties (company and grantee). This agreement includes information such as; your name, grant date, type of options granted (ISO or NQO), number of shares, grant price (the fixed purchase price), and vesting information (the amount of time in which you earn the right to purchase the shares, usually a 3-5 year period where batches of options vest every month or quarter).

The screenshot below shows a portion of the first page of Sophia's Incentive Stock Option (ISO) Award Agreement. Here we can see that she was granted 11,000 shares of common stock at an exercise price of $0.05 per share on March 7, 2020. She also has time based vesting starting on March 5, 2020.

Vesting can happen immediately or over time. In Sophia's example, her time-based vesting schedule is as follows: Every 3 months for 4 years with a 1 year cliff. This means the first batch of shares (25%) are vested on the 1-year anniversary of the vesting commencement date, March 7, 2021. The remaining shares (75%) will vest in 12 equal installments every 3 months for the next 3 years. Sophia's shares are expected to fully vest on March 7, 2024. The screenshot below shows a visual interpretation of this grant in Shoobx, which Sophia can view by clicking on the "My Equity" panel on her dashboard.

Am I required to exercise my options? How do I do so?

You are not obligated to ever exercise (or purchase) your options, but if you choose to, your options will be exchanged for shares of common stock. Shoobx allows you to quickly view the details and keep track of the equity you have acquired through your employer. There are many things to take into consideration when deciding to exercise such as; how is the company doing, can you afford the purchase price, and is it a good time to exercise? We recommend speaking with your tax and financial advisors when making these decisions.

When can I exercise my options if I choose to? 

Remember, you can only exercise your options if they've vested, unless your company offers early exercise - meaning you can exercise options at any time, regardless of whether they're vested. Something else to keep in mind too, is that options usually expire after 10 years, or a shorter span of time if you leave the company. That means that, f the options are not exercised (purchased) in the given timeframe, you will have to forfeit them.

For example, if you decide to leave the company, your shares stop vesting immediately and you only have the option to purchase your “vested shares.” You also only have a certain amount of time called your post-termination exercise period (decided by the company) to exercise these. If you leave on good terms, this period is usually 90 days.   

I'm ready to exercise my options. Now what? 

Shoobx offers a simple workflow to process your option exercise. To learn how to exercise your stock options in Shoobx, check out this article.

As always, if you have any questions that are not addressed in this article let us know by emailing support@shoobx.com!