I worked for a startup and as an employee, was “granted” 34,000 “Options” and “vested” in 8,000 “Options (ISO)”. The company has not gone public yet but likely will in the next 3-5 years. I just left the company and the exit paperwork says “Upon termination, you have three months to exercise your Options before they expire.” I have no idea what this means. What happens if I exercise them? What happens if I don’t? What does it even mean to exercise them? Please help.
In: 72
Oh, neat. I’m an attorney and my practice focuses on private companies (mostly startups). Option grants and exercises are well within my wheelhouse. This will not be ELI5, but hopefully ELI “reasonable adult” and I’ll answer further questions if you have any. I’m tired and my meds are wearing off, so please forgive me if this is not comprehensive.
**Obligatory: this is not legal advice, I am not your attorney, I cannot advise you as to the legal nuances of your option.**
I can, however, try to explain the basics as simple matters of fact. For a more thorough explanation of *your* option grant, you need to get your option grant paperwork (request this from your former employer) and an attorney who does this kind of work (not a Swiss-army-knife attorney who does everything). This is a very broad-strokes explanation. There is *a lot* I don’t go into here that you should consider (taxes, preference, participation, etc.). If you are seriously considering exercising your option, consult with an attorney.
**TL;DR:** you have the right to buy up to 8,000 shares of stock of your former employer at a price that was set around the time you were hired.
Your former employer (the “Company”) is (most likely) a corporation. It may be a “limited liability company” or “LLC,” but it doesn’t matter for this.
A “share” is a portion of the Company. Not in the sense that owning shares means you own the HR department, or desks, or computers. More in the sense of if the Company gets sold, you get a cut of the dough. With startups, this is sometimes not straightforward and you should consult with an attorney about the details.
An “option” is a right to *purchase* shares at a specific price. You and the Company made a deal: you work for them and they pay you cash, they promise that you can buy shares, they promise you can buy more shares the longer you work for them, and they promise that you can buy those shares at a specific price. That price will (likely) be the fair market value of the shares at the time you and the Company made your deal.
That price is called the “exercise price” or “strike price.” It is set in stone.
“Exercising” your option means demanding to buy shares at that price. Same as “exercising your rights” because that’s what it is: you have a legal right (but not an obligation) to purchase up to a number of shares at the exercise price.
Your option has “vesting.” Vesting simply means that the number of shares you can demand to buy grows over time. This is the “they promise that you can buy more shares the longer you work for them…” I mentioned before. At first, you could demand to buy zero shares. That number went up while you worked for the Company. Today, you can demand to buy up to 8,000 shares of the Company at the exercise price. Your option has “vested” over 8,000 shares.
Your option “expires” after a certain time. “Expires” simply means you cannot demand to buy shares. Same as a coupon: when it expires, it just don’t work no more.
Why did the Company offer you an option as part of your pay? A few reasons. The most important one right now is that giving options doesn’t cost the Company cash. The Company can give you a better offer without paying you more out of pocket. Employees like options because, if the company does well, the employee could buy shares at a hefty discount and sell them for a profit later (among other things). This, in turn, means that companies like options because it gives employees another reason to work hard and to stick around. The employee’s option becomes more valuable as the company does better and as the option vests.
The best case for you is that the Company has done very well and is worth a lot more today than it was when your exercise price was set, because that means you can buy up to 8,000 shares for much less than they would cost today.
Let’s pretend that your option has an exercise price of $0.10 per share. You could buy the entire lot for $800, and let’s pretend that you do. You have 8,000 shares. What are they worth today? Hopefully more. $0.20 each? $1? $3? Again, talk to an attorney. But if they are worth more, you can own shares worth far more than the $800 you paid for them.
Imagine being able to buy shares of Google at a price from 2004 (~$3 per share) today. Those shares, right now, are worth about $136. Would you take that deal? Hell yeah you’d take that deal. Damn good deal. I doubt the Company has had such a huge increase over the course of ~1 year (guessing based on your vesting schedule), but it still may be a nice return.
You may not even have to pay– a “[cashless exercise](https://www.investopedia.com/terms/c/cashlessexercise.asp)” may be available. Again, attorney.
ISO is just a type of option. “ISO” stands for “incentive stock option.” If you see “statutory stock option” or “qualified stock option,” those are the same thing. ISOs can only be offered to employees (not contractors) who are US taxpayers. ISOs get favorable tax treatment. The other type is called a “non-qualified stock option,” or “NSO” for short.
Sometimes people say you have “8,000” options, but that’s shorthand. You have *an* option to buy up to *8,000* shares.
Finally– some additional resources written by folks who have editors and who are not fighting to keep their eyes open:
1) https://www.investopedia.com/articles/stocks/12/introduction-incentive-stock-options.asp
2) https://carta.com/blog/what-are-incentive-stock-options/
Investopedia has a bunch of information about securities, investing, etc. Carta is a platform that companies use to manage their stock and other securities (like options!). Both of them have better quality writing than what I’ve put together. But I hope my post is helpful!
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