How does common stock option work in a startup?

Question

Alex Khomenko · Answer

Yes, that's pretty much how things work. Don't feel too bad, as it's still not uncommon for people to not fully understand all these details as they get involved in startups. The standard story they are used to hearing is always about a startup hitting it big, and everyone getting rich, but of course that's not how it often happens - that's why one should never join the startup thinking about the riches the options will bring. It can be a nice icing on the cake, or even a life-changing event one if things truly do go well, but in the end you better like your team, your mission, and your work enough to stick around for the long haul.

Back to the question - if you can't afford to put up the cash to exercise the options and take care of the tax implications, and your startup isn't hitting serious traction yet, your options are limited. The two main ones are to cut your losses and leave the options on the table if you don't like the company or don't think it will do well, or (hopefully!) buckle down and grind it out until a liquidity event happens because you're doing something awesome, learning a lot, and having fun.

Finally, let me give a brief overview of some other scenarios that I can think of that are relevant, but only apply in specific circumstances. 
 * If a startup is really hot and there is a secondary market for the shares, then an employee may be able to exercise and then sell a chunk of their shares to cover the costs of exercise and the tax bill (pretty much the same as Exercise-and-Sell-to-Cover or Exercise-and-Sell for options on publicly traded stocks). 
 * The company may make a loan to the employee to cover the costs - usually reserved for high-level executives and/or others who have leverage to negotiate such a deal.
 * An organization / fund / individual may be able to loan the employee the money to cover the costs, in return for future interest in the stock (for an example of such a fund take a look at 137 Ventures [ http://137ventures.com/ ])
 * The company may decide to offer an "early exercise" provision in its Stock Option Agreement, and then have the Board approve certain grants as "early exercisable", in which case an employee with such a grant has an option (eek) to exercise their options before they are vested, receiving Restricted Stock (usually with same vesting schedule as the exercised option) rather than Common Stock in return. This is the scenario where an 83(b) election for the restricted stock may be extremely important for tax reasons (but it will do nothing to change your exercise cost). The early exercise option, however, is an additional hassle for the company to set up and administer, and even if it's available, the company has discretion in who it will grant it to. In any case, all this has to be figured out before the option agreement is signed.
 * An early employee may be able to negotiate a grant of Restricted Stock rather than Stock Options. Since there are tax implications, it's easiest to do this while the company stock has only nominal value. It's possible to do later as well, but the additional cost and hassle must be worth it to the company. This is another scenario where an 83(b) election is essential.

Hope this helps, and good luck. Here's one useful link, and Google will give you plenty more: 5 Mistakes You Can't Afford to Make with Stock Options [ http://gigaom.com/2011/06/05/5-mistakes-you-cant-afford-to-make-with-stock-options/ ]

Rachel White · Answer

Given options in an early stage company aren’t normally sellable until there is an exit event, this means paying for the options now (on exercise) and having an asset you may not be able to turn into cash for quite some time.

This decision needs tax advice, I would suggest you talk to an accountant about that.

The bigger question is whether you want to outlay cash now for an asset that may not be worth anything in the future. If you do that, you don’t get your money back, you lose it. With options, the whole point is you don’t pay anything for them until they’re worth something.

Your accountant may talk to you about the capital gains benefits of exercising early, which may be true. It’s something worth looking at once you know your employer has a decent customer base, a growing revenue model and is starting to hire a lot of people.

Good luck, hope it goes well for you :)

Dan Walter · Answer

"Come here Rover, I have got something to explain to you. Stock Options ....STOP scratching yourself and listen....Stock Options are an offer from the company to allow you to buy company stock at a later date. The cool thing...STOP sniffing my pant leg....The cool thing is that the company will let you buy that stock at today's price.  If the stock price goes up then you get a deal.  If it goes down, then you get nothing (or close to it).  A couple of key details....COME back here and stop rubbing noses with that cute poodle...If you quit your job anything options that haven't vested will probably go back to the company.  In fact, ...GEEZ stop pulling at your leash!... the shares you do exercise may also be bought back by the company (I would have to read the plan and agreement to know for sure).

...What did you ask boy?  How do you value them?...  The company is required by IRC 409A to have a reasonable valuation performed on the company at, or near, the time of grant and again at least annually or whenever the value may have materially changed. ....OK, just hang on and I will get you a treat....The 2000 options you received could have a starting value of a few dollars or a few thousand dollars.  It depends on the number of shares outstanding and the total value of the company.  The final value will depend on the success of the company, and your ability to keep your options etc.  ...I'm not sure what's in the treats, probably beef and bones or something like that...They could be worth nothing or they could be worth millions! The key is working to raise the value of the company as a whole.

I hope this helped a little.  Now roll-over and let me rub your tummy.

Kee Nethery · Answer

Stock options are very simple.

A "stock option" is the right to buy stock from a corporation at a specified price some day in the future.

The trick to a stock option is that the price of each share is set to the price of the stock on the day the stock option document is given to the employee.

Here's an example. Apple is at $132 per share as I type this. If Apple gave you options today to buy 1000 shares in the future at $132 per share, the value of that to you is zero. You can buy shares today at $132. As far as taxes are concerned, the stock options have no value today. You owe no taxes on that stock option grant.

Now, 4 years from now when you can actually "exercise" your option to buy the shares, if Apple stock is less than $132, you wouldn't buy the stock. But if Apple was worth more, let's say $232 per share, you would buy your 1000 shares at $132 and if you immediately sold them, you'd make 1000 * (232-132) = $100,000. You would then owe taxes on the $100K profit.

However, if you buy the shares at $132 and don't sell any, still no taxes need to be paid.

The most common scenario is that you borrow money from the company to buy all the shares and then you immediately sell just enough to pay back the money and the taxes on the shares you sold. You end up with a bunch of Apple stock that cost you nothing.

The goodness of stock options is that a company can give options at no cost to the company, the employee can receive options at no cost, and if the company becomes more valuable over time the employee ends up with company stock without spending any out of pocket money.

Why do companies do this?

They do this to encourage good employees to not jump to some other company. They do that by adding a "vesting schedule" to the options. They give you the document today but your right to actually buy shares at the option price (Apple $132/share) happens over time according to the "vesting schedule".

A very common vesting schedule is for you to get no vested shares until 12 months (the "cliff date"). On the cliff date you "vest" and could buy 12/48ths of the shares. Each month after that you would vest another 1/48th of the option grant. At the end of 4 years (according to this example) your options are "fully vested".

Nishtha Chavda · Answer

Hello Traders,

Stock options are financial derivatives that provide the buyer the right, but not the obligation, to buy or sell an underlying stock at a predetermined price (strike price) on or before a specified date (expiry). These are commonly traded on the NSE and BSE in India and are part of the broader derivatives segment.

There are two types of stock options:

* Call Options: The right to buy the underlying stock at the strike price.
 * Put Options: The right to sell the underlying stock at the strike price.
Key Features of Stock Options in India:

* Standardized Contracts: Options are standardized in terms of lot size and expiry dates (e.g., monthly or weekly expiries).
 * Underlying Asset: The underlying is typically a stock listed on NSE or BSE.
 * Premium: The buyer pays a premium to the seller for the right. This is the cost of entering the option trade.
 * Strike Price: The pre-decided price at which the buyer can exercise the option.
 * Expiry: The last date when the option contract can be exercised.
Options trading is a complex segment of the stock market that requires expert analysis, real-time market insights, and risk management strategies to be successful. Many traders struggle with options due to rapid price movements and time decay, but with the right guidance, it can be one of the most profitable trading strategies.

At Eqwires Research Analyst, my priority as a Relationship Manager is to ensure that my clients consistently achieve profitable trading outcomes with well-researched strategies.

Just recently, one of my clients booked an impressive profit of ₹11,850 in LTIM Call Options, leveraging our expert trading insights. This success highlights the power of strategic stock selection and precise market analysis, helping traders maximize their returns with confidence. The numbers don’t lie—accurate research leads to real profits!

📈 Today's High-Quality Trade Update 📊

📅 BUY DATE: 24/03/2025

📅 BOOKED DATE: 26/03/2025

💼 Trade Details

Trade: POSITIONAL

Stock: LTIM APRIL 4300CE

Quantity: 1 LOT

Buy Price: ₹351

Sell Price: ₹430

💰 Profit Booked: ₹11,850/-

💸 Capital Required: ₹53,000/-

Why Do My Clients Achieve Consistent Profits?

Successful options trading is not about making random trades—it’s about analyzing market trends, managing risk effectively, and executing well-planned strategies. At Eqwires Research Analyst, we provide expert insights, data-driven analysis, and precision-based recommendations that enable traders to make informed decisions. With our proven track record, we help clients take advantage of short-term market movements while minimizing risks and maximizing profitability.

The Secret to Profitable Options Trading

Options trading in India presents exciting opportunities, but success requires strategy, risk management, and market awareness. By following a disciplined approach, staying updated on market trends, and implementing well-researched strategies, traders can consistently generate profits and grow their portfolios with confidence.

I hope you liked my answer and it will help you too. Please share your feedback regarding my answer and keep upvoting and sharing.

THANK YOU.

Happy investing! 😊

Brandon Smietana · Answer

There are a number of factors to consider.

If the company is a cash cow, you want equity; unless the company is not going to exit.  In many industries the owners is more interested in getting money out as profits than selling the business.  A company with 1 million a year in profits is as good as 20 million dollars earning 5% a year interest.

If the company is VC backed, the investors will want an exit and you should be careful.  Pretend the VCs bring in new management and the valuation goes down.  The executives will get new equity, you will be diluted in the down round and the founders will be washed out (Equinex).

Pretend you join a successful startup like Digg and you tell yourself "This company is going to sell for $150 million and I have 2% of this company".  You think you made a safe choice.  Well, the company fires a bunch of executives and decides its time to take a down round and cram down the other equity holders.  The VCs share increases, the management's share is retain but all the common shareholders get wiped out.

Or if you are in a capital intensive industry, a market crash can cause a down round (if the company needs capital to continue operation) and your stock is worthless.

Also, if there is a high liquidation preference on the money the investors put into the company, management and investors are likely to prefer a lower sale price and larger option package at the acquiring company, rather than a larger sale price for the company.  Ok for the investor, great for the management, bad for the employees and common shareholders.

In Myspace, the company sold for 330 million but the common stock was almost worthless and the employees made very little.  Creative use of structuring the company's equity can significantly reduce the upside employees receive from an exit.

Also, employees are unlikely to be protected by terms such as accelerated vesting on change of control and are much less protected than executives.

There are 3 lessons:
1. start your own company.
2. get lucky.
3. be an executive.

Executives get giant salaries and get more equity than you and they are in a position to protect their equity stake (if they can remain useful).

Executives also receive a more favorable tax treatment than you (restricted stock grants and 83(b) elections).

Best case is that you get 2% of a company and it sells for 100 million (most deals today are small M&A less than 30 million) and after investors and liquidation preference you have 700k and get 300k in retention bonus at the acquiring company.  This is being extremely optimistic.

For most people:
1. You will not get rich on salary.
2. You will not get rich on equity.

You should start your own company or accept being poor.

Robert Maynard · Answer

The answer to this simple question is very complex.  I'll take a stab at doing it right.

Issued and Outstanding Shares:  This is number of shares that have been granted or sold to people in the company (subsequent investors, etc).  The number of shares issued equals 100% of the company's equity, without accounting for options. (more on options later)

Authorized Shares:  This is a large pool of shares that allows the company to issue more shares.  For instance, when you incorporate your will authorize say 1,000,000 shares, but you will only issue a fraction of that, say 100,000 and distribute them to the appropriate parties.  If you issue 10,000 shares to a founder, he then has a total of 10% of the equity.

Treasury Shares:  The difference of Authorized Shares and Issued shares.  These sit in the pool waiting for additional grants to be made for whatever reason.  Let's say you get an investor who wants 1/3 of the company.  You would issue 50,000 shares (100,000 issued plus 50,000 new shares out of the Authorized pool).  You would then have 150,000 shares and your founder who had 10% now has 6.7% of the total equity.

Common Shares:  These are usually the shares (I know this is a circular definition, but it works) that people who are putting in sweat equity, like a founder, get.  They usually vote and control the company until an investor comes in.

Preferred Shares:  Stock that has some sort of right not granted to the Common Shares.  Usually, it is a Participation right.  For instance, if you sell Preferred Shares with a 1X participation, the Preferred shareholders will get their total investment back before splitting the rest of the money with the Common Shares.  It's not unusual to see 2x or 3x Participation, which just means that the investor gets that multiple back before Common Shares get their money.  When raising Angel money, I issue a 1x Participating Preferred
with no vote.  The reason for no vote is that it is much easier to administrate the company when you have to do legal things that require a vote, such as a Director's appointment, new financing, liquidation, merger, something like that.  If you have many small angels, their vote is immaterial compared to the Common, but if they have the vote, it's like herding cats to get all the signatures of all the angels.  Preferred dilutes Common Shareholders the same way that issuing new Common.

Seed Round:  This is simply the financing round that you get, usually from smaller angels, before you have customer traction.  In my experience, this is the hardest money to raise.  You should expect to dilute the company by 25% for your Seed Round.

Series A:  This is the round where you usually get professional investors who write bigger checks.   It doesn't have to be venture capital.  Series A generally comes after you have proven that your revenue model works and have onboarded some customers.  This is almost always Participating Preferred that comes with a Board seat and the vote.  You should expect to dilute by 25% for this round.

Series B and beyond:  This just means that you're company is taking off and you're taking more money for growth, acquisitions or R&D.  This will be another flavor of Participating Preferred.

Options:  These are the vehicle that you vest with your employees or vendors so that they can participate in the equity upside if there is one.  These do not dilute until they are paid for by the employee at what is called the "Strike Price" or the amount you are charging them for the shares.  A lot of companies make these much cheaper than what the investors are paying in an effort to make the equity "free."  Lots of new IRS regulations that can hurt both you and them if you give highly discounted Options.  For the sake of simplicity and fairness, I always give options with a strike price that is the same as the last investor round.

Warrants:  These provide a right to purchase a share at a specific price within a specific period of time.  They are used to lower the purchase price of the equity an investor gets.  For instance, if an investor buys 10,000 shares @ $1, you may give him 10$ warrant "coverage" @ $1  Meaning he has the right to buy up to 1,000 shares at any time, usually within 5 years @ $1 a share.  This allows him to buy more equity at his discretion if the stock price is going up.  These can be very powerful, especially to institutional investors because many don't pass through the warrant coverage to their investors and keep that upside for themselves.  Greed is Good for you in this instance.

Cashless Warrants:  These are issued to people who help you bring in money "rainmakers."  It allows them to exercise their warrants @ the same price the investors bought in, but only upon liquidation so that the company gives them a one-day loan to buy the equity, then the warrant holder pays the company back the next day when the cash is distributed.  These usually have a 5 year life.  You will hear a rainmaker quote "5 and 3"  This means they get 5% of the raise in cash and 3% of the raise in cashless warrants.

Restricted or "locked up" shares:  When you're ready to go public, your investment bankers are not going to allow large equity holders (usually those with more than 5% total equity) to sell their shares on the market for a period of time, usually six months or, if you're a big shareholder (or the CEO), in a step pattern (25% opens up in six months, then another 25% in 12 months, and so on.

Reverse vesting:  This happens when institutions come into the deal and they want to put golden handcuffs on key employees, founders, etc.  What it means is that you put your shares in a pool and earn them back over time, usually 5 years.  Don't be scared by this demand, it is standard and not an evil plot to take your equity.  I've always been able to retain the voting rights of the shares that I've had to reverse vest, so you still have the same power in corporate governance.

I think that's it.  I'm sure there are more esoteric types of shares, but you won't see them until you hit the public market.

Good Luck!

Grant Buchan-Terrell · Answer

I see a lot of similar questions about startups and corporate finance, whereby it is assumed that there are rules or laws or a secret recipe book for determining various complex and subjective (to the startup) issues. There are few rules, some laws and the absolute certainty of the need to acquire and follow expert finance, tax, accounting and legal advice from inception. I’m not pitching legal services, but the rich get richer from good advice.

There are many ways to raise capital and to attract, retain and incentivize(?) employees. There are many ways to save cash to prioritize startup, development costs.

Stock options defer stock ownership of course, to a time and cost specified in the option, a short time out or a long time out. Options can be exercisable at a low price relative to current or forecasted value, or full value, or speculative value. Each factor belies a corporate intention or reality.

A corporation can offer stock options at literally any time at all. At startup, what is the value of the corporation? No one knows, $zero, $minus or $gazillion. Options granted early in the startup phase are fantasies. New employees may demand them, but founders should beware of giving away the farm unintentionally with too generous options. Options, being contracts, can be changed by agreement of the corporation and the employee.

In Canada, stock options have significant special tax considerations. A share purchase plan, exercisable at the reasonably current fair value, are more straightforward.

An option is a financial bet: the holder/employee hopes or bets that the exercise price will be a lot less than the later fair value or traded value. The corporation enjoys the proceeds received from the exercise, but usually some employee options amounts are not material to its overall capitalization. The option is typically used to attract, reward (like a bonus or big tip) and retain senior level employees in a deferred manner. If the option price is below fair or market value, the employee will defer exercise, or let the option expire. That is not good for HR.

Often, the option is not exercisable until after the employee gets beyond the probation period, usually 3–6 months. Vesting and exercise date are not the same, but the idea is that the employee cannot enjoy the option until some future date, fixed or a formula. The option is usually terminated automatically if the employee leaves for any reason at all - you don’t want unhappy or disloyal people as shareholders, even with small holdings. Options are used to attract and reward long time employees, too quite different things of course.

In my opinion, options should not be granted early in the startup because neither the corporation, nor the employee can value the corporation or even its prospects. I think options should only follow upon substantial development or even initial commercialization of the product or services.

Your questions really asks whether or not a new employee should get options - not so much whether or not the startup is early stage or mature. However, it is all interrelated. I would not give new employees options until well after the probation period, with staged vesting over 2–5 years and realistic exercise prices that can be adjusted.

Options for publicly trade corporations are much different than for private startups. Of course, everyone hopes that a startup will succeed by going public or be taken over, and that impacts on the options terms.

I hope that answers your question and maybe some others too. Onwards!

Gil Silberman · Answer

The key metrics from a private venture-backed startup are these:

* #1) How many shares of stock your option covers
 * #2) The “strike price” (or exercise price, same thing) for each share you may purchase. Multiply #1 by #2 and you will get the total amount of money you will have to pay your option in full
 * #3) How many shares of stock your company has, on a “fully diluted” basis — including shares already granted, and shares allocated to the option plan and certain other purposes. Divide #1 by #3 and you will get your percentage ownership of the company. This is the best benchmark against your position at very early stage companies, where the valuation is somewhat arbitrary.
 * #4) the price per share of preferred stock solid to outside investors in your company’s most recent round of preferred funding
 * #5) the valuation of your company. By definition this is #3 X #4. If it is not, something is wrong with your information.
 * #6) the aspirational exit value of your company if all goes well. Companies cannot make this promise so it may be up to you. If the company lives up to expectations is it a billion dollar company at IPO or acquisition? Ten billion? Fifty million? Multiply #6 by #3, discount for some factors described below, your exercise price, as well as taxes and the time value of money, and you get an idea of how rich you might be later in life if you and your company win the stock option startup lottery.
There are also some critical secondary factors.

* #7) Is the strike price based on a recent 409A appraisal of the company made in light of a recent significant funding round? Are they planning a new 409A appraisal soon, and why?
 * #8) Is the valuation based on a recent, significant funding round by reputable venture / private equity investors? If #7 and #8 are positive, the numbers are more real and the chance of success may be somewhat greater.
 * #9) What is your company’s stage of growth? Seed / pre-seed: (under $3 million funding, founders running everything, a few employees, everything is informal)— Early stage venture: Series A or Series B, $5–550 million funding, $10–100 million valuation, 20–100 employees — middle stage: $50–200 million funding, $200–800 million valuation, 80–300 employees? Late stage / pre-IPO: $100M to $10B funding, $1B+ valuation, 200+ employees? This gives you an idea of how much upside is left in your option (see #6), but also how long it may take to get there and how likely that is. A seed stage company could give you 10X to 100X or more upside on your total purchase price but is typically 6–10 years or more from an IPO or other billion dollar+ exit, and statistically, will probably fail or suffer a “soft landing” (AKA early exit, a sale at a substantial but disappointing price) before it gets there. A pre-IPO company may only get you 1–2X return after taxes but it has a better than even chance of getting there in the next 1–4 years.
 * #10) what is the total funding your company has ever received? Assuming normal funding deals, this will give you an idea of the total liquidation preference held by preferred investors. That money comes off the top in an early exit. If the total exit value is not a multiple of the funding amount, or if the exit value is not greater than the current valuation, you end up in the common situation where options are worthless or close to worthless and the employees walk away with nothing.
And finally, the deal terms for your option. Most of these are not negotiable, as they were set up when the plan was in place. But it will give you an idea of whether the company is being fair and generous to its employees, or whether your options are mostly for show.

* #11) What are your vesting period, cliff, and vesting start date? Industry standard is 4-year vesting with a 1-year cliff, and a vesting start date based on your first day of service (or when you started earlier, as a consultant). These three, plus the total number of options, are usually the only things negotiable for rank-and-file employees.
 * #12) Are there any special terms like early exercise, cashless exercise (net issuance, option loans), extended exercise (you have longer than 90 days to exercise, post-termination, if you leave in good standing), shorter cliff, back-dated vesting start date, and double-trigger acceleration or severance acceleration / benefits? The last two are reserved for key executive hires, typically.
 * #13) Are there any especially bad terms like bad leaver clauses (your stock goes back to the company if you resign or are fired for cause)? These are toxic.
 * #14) Does the company regularly do or have plans for internal tender offers or other employee liquidity programs? Your options are not worth much if you can’t sell them, or if you have to wait ten years until you are older and your company is quite possibly out of business.
 * #15) What are the transfer restrictions on the stock purchasable with your option? Is there a red flag like co-sale obligations (if not a founder or key employee), prohibitions against attempting to sell your shares, board approval for any stock sale, or forfeiture provisions if the company decides you have violated the rules? Is the company unwilling to make a commitment that it will not put additional restrictions on your stock in the future? Are early investors, founders, and management giving themselves exceptions from the restrictions as you will have on your stock? Any of these indicate that the company may not be taking a fair, generous approach to rewarding its employees, at least not as part of the stock plan.
 * #16) Ask to see the equity incentive plan (AKA stock plan, option plan, etc.) and the company bylaws. You will need these if you ever want to sell your stock someday before the company exit. If you know what you are doing you can read these for red flags, and also to understand your company better. If your company refuses to give them, they’re not being fair or transparent — see #15.
(*) Technically, you are granted a single option at a time, and it covers multiple shares. However, many people informally refer to each share you can purchase with your grant as an option, and the totality of your grant as a number of options.

Franco Caporale · Answer

It’s very hard to evaluate your stock option package if you only know the number of options and the strike price, which is normally what companies tell you when you receive the offer - “X,XXX shares at $XX.XX, pending Board approval”. In early stage startups, it’s important to know the overall number of shares issued and outstanding, or what is the percentage of the company that you will own once you have vested all the shares, assuming you don’t get diluted further.

For example, if they have issued 10M shares and you are given 100,000 options, you technically own 1% of the company once you vest and exercise them. If the company gets acquired for $500M, your shares will be worth $5M. In this way, you can calculate in your head the likelihood of each scenario for your particular company/industry. This also allows you to look at benchmarks for your role and the particular stage of the company.

The most common vesting schedule for startups is 4 years with a 1-year cliff, so if you leave before 12 months, you don’t vest any option.

Now, here’s a few tips from someone who has worked for several tech companies:

* Don’t start negotiating on the number of shares unless you know what is your ownership percentage, and you can argue for a specific percentage based on role/responsibilities, otherwise you will sound very naive. Several people that I hired in the past have asked me for more shares, but they only knew the number and strike price (they could have been worth 50% of the company for what they knew). Ask what is the total number of shares issued and ask them to specify the percentage number.
 * Make sure that they are referring to Incentive Stock Options (ISOs), since they have a special tax treatment. If you are issued Non-Qualified Options (NSOs), their gain is taxed as regular income.
 * Always ask to review the option agreement and ideally have your attorney review it for you if the number of options is material. Some companies still have a clause where they can buy back your options at Fair Market Price, including vested ones. I found a few of these myself.
 * Be careful with taxes: ISOs are not subjected to regular income taxes, but they might trigger AMT (Alternative Minimum Tax). During the dot-com bubble of 1998–2000, countless of people received multi-million dollar tax bills for “income” on stock options that were skyrocketing in value. Unfortunately, that was only paper value, since many of them never went public, but the cash paid for taxes was real.
If you get fired or quit before 12 months, you leave with nothing. Once you leave the company, you normally have 90 days to exercise your vested options or you’ll lose them forever.

Mike Moyer · Answer

In most startups equity allocations are random guesses based on the founder’s overly optimistic opinion about future, unknowable events. The chance of creating a fair split is approximately 100%.

Lots of startups all over the world use the Slicing Pie model instead. Unlike traditional unfair splits based on guessing, the Slicing Pie model is based entirely on logical, obvious, knowable facts. Fairness is a matter of fact, not opinion.

Everything in business can be quantified in terms of fair market value. If you are paid a fair market value for your contributions you aren’t risking anything and, therefore, don’t deserve any equity. If you are not paid, your unpaid amounts are essentially “bets” on the future success of the business. Everyone who isn’t paid is placing bets every day. When the company has enough money to pay, the betting stops and you can simply add up the fair market value of each person’s bet.

Your % share of the equity should be based on your % share of the bets.

This is a logical, obvious, unambiguous approach. Anything else is a silly, misguided attempt to guess future events.

You can learn all about Slicing Pie at www.slicingpie.com

David S. Rose · Answer

Typically, yes. Working at a startup is risky in terms of job security and relatively low-paying compared to larger company market salaries. At the same time it generally requires more self-direction and more commitment. Because of that, it is traditional to provide equity to everyone in the company so that they both have a sense of ownership and will benefit from the growth in the company that they help to create.

Robert Hurst · Answer

Stock options give the option holder the right to purchase shares in the ownership of a company at a fixed price at a future date

If the startup is successful and the market value of its shares goes up the option holder is able to purchase shares at the fixed price which is now a discount to the market value of the shares

If a buyer can be found for the shares acquired by an option holder the employee makes a capital gain on the sale of the shares equal to the difference between the market value of the shares and the option price that the employee purchased the shares for

If a bootstrapped startup ends up being sold several years later for millions or billions of dollars the early employees who were granted options in the early bootstrapped period may find that they make a huge capital gain when the exit event occurs

The problem is that nine out of ten startups fail and hence the share options granted to employees end up being worthless

Of the 10% of startups that survive only a small percentage go onto exit for millions or billions of dollars and although the capital gain from the options may be significant the gain is often not sufficient to make all option holders rich

Share options also usually come with restrictions such as a restriction whereby a share option shall lapse if an employee leaves the employment of the startup before the earliest vesting date (being the earliest date that a share option can be exercised and converted into shares). Accordingly many options end up lapsing before the employee holding the option has an opportunity to exercise their share option

As there is often no market for shares in a private company until an ultimate sale of the company or a listing on a stock exchange an employee may have to wait s long time before they can sell their shares and often has to pay out cash themselves to buy their shares before their options lapse

For startups that are ultimately successful the capital gains from share options can be significant for early employees and in many territories are taxed at a lower rate than salaries

For example £10,000 of share options that we granted our early employees ended up being worth over £400,000 albeit some 18 years after first being granted their share options

For those employees who still held unexercised options at the end of the 10 year option period the company made an ex gratis bonus payment to give them the cash to exercise their share options before they lapsed as it was already clear that the shares would be worth a lot more than the £10,000 option price

Other early employees had already left the company before our 10th anniversary and had let their share options lapse without being exercised so sadly never saw the £400,000 gain that they would have seen from their share options

Employees who stayed with the company also received additional share options in later years including a few individuals who grew with the startup into very senior roles and those individuals made capital gains which were life changing when we ultimately exited on top of the gain referred to above from the options granted during our early bootstrapped startup period

The advice I gave our early employees was to assume that the share options were worthless but to put them in a safe place as one day if we got beyond the barriers that we knew we faced as a startup those options might end up being worth something

Too many startup founders oversell the benefits of their share options to employees and use the options as an excuse to get people to work for free or for below market rate

As a bootstrapped startup we couldn’t afford to pay the sort of salary that a big company could pay but we were honest with our employees and those employees that chose to work for us knew the risks that they were taking and saw upsides in other areas ( such as flexibility on working hours or career profession opportunities if we were successful) and not just relying on the benefits of share options as a get rich scheme mis-sold by a founder who is often overly optimistic about the chances of their startup being successful

Indrazith Shantharaj · Answer

Options trading is a type of trading in which buyers purchase the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a designated expiration date.

When trading options, it is crucial to understand the two types of options available: call and put. A call option gives traders the right to buy a security at a predetermined price (the strike price) before the expiration date. Conversely, a put option gives traders the right to sell a security at a predetermined price before the expiration date.

A trader can use options to speculate on the future direction of security, hedge (protect) a current position in a security or generate income through selling calls and/or puts. Traders can also combine options into more complex strategies such as spreads, straddles, and collars.

When trading options, traders need to consider many factors, such as the underlying asset's price, time of expiration, and volatility. They also must assess their risk tolerance and decide which strategies are best for them.

Options trading is considered a high-risk activity due to the potential for significant losses if the underlying asset moves significantly against a trader's position.

Let me take a simple example to explain options in stocks.

Image - BPCL movement today in Equity

If you look at the above image, it is clear that BPCL opened at 337 and closed at 349.

Let’s assume for some reason a person wanted to a long trade in this stock at open. If he had 1 lakh capital, then he would have taken 296 shares (100000/337) and the total profit in equity is Rs.3,552

Another person with the same capital takes trade in options.

Image - BPCL 350 CE movement today in options

BPCL 350 CE moved from 3.35 to 8.6 today.

It means with 1,00,000 capital, he can buy 29,850 qty (ignoring lot size for explanation sake).

At the end he makes Rs. 1,56,000 profit.

This is the difference between trading in equities and options.

But please note this is a cherry picked example to illustrate the power of options in stocks and options trading brings more risk on the table.

Options trading involves significant risk and is not suitable for all traders. Before trading options, it’s important to understand the risks and rewards associated with this type of trading instrument.

Trading options can be complex and risky, so it’s important to understand them before taking a position in an option contract.

Traders should know the below risk factors before trading options in stocks:

1. You can lose more money than you deploy

One of the risks of options trading is that you can lose more money than you deploy (in options selling). This is because options are a leveraged product, which means that you only have to pay a small amount of money up front in order to control a larger amount of stock. While this can lead to large profits if the stock price goes up, it can also lead to large losses if the stock price goes down (if you are a CE seller)

2. Options are a complex financial product

Another risk of options trading is that options are a complex financial product. This means that they can be difficult to understand and trade successfully. If you don't fully understand how options work, you may make poor choices when trading them, which can lead to losses.

3. The market for options is volatile

Another risk associated with options trading is that the market for options is volatile. This means that prices can fluctuate rapidly, which can make it difficult to predict whether or not a particular option will be profitable. Volatility can also make it difficult to exit a losing position, as prices may move against you before you have a chance to sell your position.

4. Options are subject to time decay

Another risk of options trading is that options are subject to time decay. This means that their value declines as they approach their expiration date. This is because there is less time remaining for the underlying stock price to move in the desired direction. As such, it is important to consider the expiration date when buying options carefully.

5. You may not face liquidity issues

If you decide to sell your option, there’s no guarantee that you’ll be able to find a buyer. The market for options is much smaller than the stock market, so there may not be as many people interested in buying your option. This could mean that you have to sell your option at a lower price than you wanted to—or even at a loss.

I hope this information helps!

Mike Moyer · Answer

One should expect to get an unfair percentage.

This is because the conventional approaches to splitting equity are fundamentally flawed and, therefore, unfair. Whatever percentage you are granted it will either be too much or too little. Either way, you are headed towards a fight with your cofounders. Time-based vesting schedules, and most stock-purchase agreements do little to mitigate the damage caused by traditional splits and probably make matters worse.

In order to get an equity split right using conventional wisdom, you must have the ability to accurately predict the future.

The basic conventional wisdom approach is:

1. Predict the future and split up equity based on your powers of clairvoyance.
2. Put a bunch of agreements in place to mitigate the damage caused by predicting incorrectly.
This is literally what people do! It’s easy to see why so many founders wind up in equity disputes that require legal intervention!

It’s not only possible to avoid the traditional problems, but also it’s pretty simple.

All Startups are EXACTLY the Same

Every bootstrapped startup on the planet is the same: they’re all gambles.

Founders all hustle to acquire the resources they need with low or no cash outlay. Founders don’t collect cash salaries and ask others to work without pay. They may even get supplies, office space and other important resources without paying. If the company fails, all is lost!

Established companies must pay for everything they need. They pay salaries, rent, etc. The amount that a rational manager would pay for something from a rational seller is known as the fair market value.

Everything has a fair market value. It’s the amount the company would pay if it could pay.

Contributions are Bets

If someone contributes to a startup and does not get paid the fair market value for that contribution the amount he or she is not paid is, in effect, a bet on the future value created by the company.

It’s possible for a company to keep track of what they are not paying just like it’s possible to keep track of what they are paying.

Equity is Obvious

If a company knows how much each person has bet then it should be obvious that each person’s share of the future value created by the company (AKA “equity”) should be based on each person’s share of the bets.

This approach, known as the Slicing Pie model, has been used by companies all over the world to create a fair equity split without having to possess special super powers of clairvoyance. Unlike traditional approaches, Slicing Pie is based on what people actually contribute in real life.

You can learn all about it at SlicingPie.com

Mike Olson · Answer

Equity can be structured in a number of ways. Typically, the articles of incorporation of the company will authorize that a number of shares can be issued.  Not all of those shares will actually exist, however; the bylaws will make the board of directors responsible for allocating those shares to key employees, the stock option pool, etc.

Typically, founders receive common stock directly, and the company has the right to buy back those shares for their original price.  That right-of-repurchase then lapses over time (usually 4 years), which is called, "vesting."  The vesting is usually structured so that after 1 year, the company loses rights to 25% of the issued shares.  This is a "cliff."  After that, a portion of the shares (2.08%) vest every month, so that after 4 years, the company no longer has any right to buy back shares.  This structure is favorable for founders, as you own the stock outright, can vote the shares, and can file an 83(b) election with the IRS so that the clock for long-term capital gains starts right away.  It also means that if your co-founder leaves the company for any reason, then the company simply buys back all or a portion of the stock, based on how long your co-founder was at the company.  This protects the company from a bad founder.

The employees of the company are often issued stock options.  Those come from a stock options pool that is typically in the range of 10% to 20% of the authorized shares.  Employee stock options also usually vest on a 4 year schedule, based on the employee start date.

Advisors to the company, directors, and possibly other important people may receive warrants, which are basically just options except they don't come out of the stock options pool; new shares are created to issue the warrants, so they are technically dilutive.  Typically, advisors receive between 0.1% and 2.0% of the company, depending on how valuable they are.  If they bring in $1 million in angel money, they're easily worth 2.0%.  If they just help you understand how business works generally (i.e. not specific to your industry) and can connect you with a few good contacts, then maybe that's a 0.1% advisor.

This brings us to investors.  Angel investment can be structured as "convertible debt."  What this means is that it acts like the company is issuing a bond, and that bond may convert to new shares of common stock based on various triggers (e.g. sale of the company).  Such bonds (a.k.a. "notes", "paper") will dilute the shares of existing stock holders, it just won't happen immediately.  The notes will also have a "cap" which is essentially a maximum valuation for the company.  If the company raises money at a valuation that exceeds the cap, then the angel investors are issued additional shares to prevent further dilution.

When venture capital firms invest, typically the company will issue a new series of shares, which are "Series A Preferred" or similarly named.  These are issued above and beyond the originally authorized shares, so it dilutes the shares of all previous investors.  It also requires a lot of paperwork.  The preferred series of shares will definitely have special rights attached to them that make them pay out more than common stock.  You will also have to give seats on the board of directors to the VCs.

Now, as to how much you should give a co-founder, there's probably a thousand answers on Quora for that question, and they're all different.  My advice is to consider equity as mostly compensation for risk taken.  I consider the "value brought to the table" portion to be comparatively minor at the formation of the company.  Whatever you decide, do not make a 50/50 split.  You need one person who is the clear decision-maker/tie-breaker.  They need 1 more share than anyone else.  This means that if you and three friends start a company, and you want everyone to have 1/4 of the shares, then you still need to give 1 extra share to a designated tie-breaker.  I say this to make clear that you don't need one person to have 51% (total control), you just need a way to make decisions without dead-lock.

The other answers have mentioned AngelList.  I find that AngelList is a good resource for getting an idea of what to pay employees, but still under-represents market value, since what you see is only a "starting bid" for a potential employee.  It is not a good resource for determining how much equity to give a founder.

Thanks for the A2A and I hope you find this helpful.

Amit Batra · Answer

Employee stock options are a common form of compensation offered by startups to attract and retain talented employees. Essentially, they give employees the right to purchase company stock at a predetermined price, known as the exercise price or strike price. The idea behind this is to align the interests of employees with the success of the company, as they will benefit financially if the company's value increases.

Typically, there is a vesting period associated with employee stock options, which means that employees cannot exercise their options immediately. Instead, they have to wait for a certain period of time before they can exercise their options and purchase the shares. This encourages employees to stay with the company for a longer period and contribute to its growth.

When an employee decides to exercise their stock options, they pay the exercise price and receive actual shares of company stock. They can then choose to sell these shares on the open market or hold onto them in hopes of further appreciation in value. It's important to note that there may be tax implications when exercising stock options, so it's advisable for employees to consult with a financial advisor or tax professional before making any decisions.

Scott Chou · Answer

For founders and the first few employees, you can do stock because you have sound basis for assigning a very low cost basis at the point of origin and letting these co-founders purchase their shares for a small price as the initial capitalization for the company. This can also make the founder’s eligible for reduced taxes as a Qualified Small Business Stock [ https://www.esofund.com/qualified-small-business-stock ].

But as the company moves forward, you can't keep doing this so it is much better to use Stock Options for the bulk of the existence of your startup. Stock options allow you to grant equity to a large number of people without triggering a ton of taxes assuming you grant options at or above the current Fair Market Value. You can use the formal 409A appraisal process to determine a reasonable number for IRS purposes. If you continue to grant shares, then the current FMV of those shares will be considered taxable compensation immediately upon vesting.

Things will flip around late in your company's history if the FMV exercise price for your options becomes so high that it is no longer a motivating factor in recruiting. Then you can consider switching to Restricted Stock Units (RSUs)  [ https://www.esofund.com/stock-options-vs-rsus ]and grant shares outright without a threshold of an exercise price. As such, it is customary to not grant as many RSUs as you might have on option shares with a strike price. To keep the RSUs from being immediately taxed as compensation, the typical measure is to include at least these 2 factors in the restrictions: vesting is a function of time (typically 4 years) and liquidity being achieved (M&A, IPO, or share redemption event). The double edged sword on RSUs is that you can't get long term capital gains treatment like you could have with options that can be exercised. Since exercising options is essentially investing in the startup, you may find that too risky to be appealing. Before you make a drastic decision to switch to RSUs, you can investigate the use of the ESO Fund Homepage [ http://www.employeestockoptions.com ] (Employee Stock Option Fund [ http://www.esofund.com ]) as a way to reduce employee risk.

Matt Venables · Answer

Many times companies will tell you the number of shares you’re getting and (possibly) the strike price.

Often the company will omit how many shares the company has issued overall (the “fully-diluted share count”), so you really don’t know what percentage ownership you’re getting. Is 30,000 shares a lot? Maybe. Maybe not.

Services like Vested [ https://vested.co ] are useful to help make sense of your offer.

As an example, Lime (the bike/scooter company) has issued a TON of shares, so each individual share represents very little ownership. There, an offer of 20,000 shares is a tiny fraction of a percent of ownership. Whereas the same number of shares at a company like Catalant would represent a much larger percent ownership.

Soham Srimany · Answer

The concept of providing stock options was introduced with the target to democratize the incentive structure of the corporate world and rewarding the employees who have shown loyalty to the firm.

It was expected that if employees see that their salary is somehow related to his performance, if he works efficiently and generates profit for the firm then the stocks of the firm increases in value and thus he is able to get higher compensation, thus motivating them to work harder (based on a very simple and cliche economic concept, that people tend to be more productive in the firms owned by them as opposed to while doing paid labor for someone else).

However, time passed and rules changed and today the stock options are mostly used to reduce tax burden on companies, and to intoxicate the employees.

Yes, you heard that right!

So talking about the first part of the problem, lets take an example.

Suppose the organization you work for makes 100 bucks in profit.

Now technically speaking the firm must pay taxes on this whole of 100 bucks.

Now for simplicity you are the only employee working in the firm and you need to be paid 10 bucks.

So, the firm can show this salary as an expense and deduct it from the profit it received, thus making the effective profit to be 90.

Now, consider the second scenario, the company says they will give you 10 bucks as salary but in a form where 6 will be in cash and 4 bucks worth of shares.

In this case, the company can deduct the 4 bucks given to you twice, once under salary given to employees and then operating costs.

Thus making the total deductions to (6+4+4=14 bucks).

Now multiply this both in terms of number of employees and value of stocks.

Talking about the second problem, if the company needs to pay you 10 bucks then it has to pay it in cash and that reduces the free cash flow for the company. However, in the second case, salary consists of a lower cash component.

Secondly, considering the second scenario, there is seldom any company which does not give any condition to access the ESOPs received by the employee and not that even in order to sell the stock, number of years in both cases.

This makes sure that the employee is given the option of continuing with working with the company, with the anticipation that he/she will receive his ESOP sometime in the future. (you won’t believe but this trick reduces the attrition rate considerably). This is because, if the employees feel that their salary is dependent to their working with the company for a fixed tenure, they are more likely to complete the tenure than to leave the firm before that.

Secondly, in the case of startups, most people might think that when the startup receives some funding and it needs to dilute some stake the employees can do so.

However, that’s not the situation, in most cases founders are the one who dilute their stake and if such a situation arises that they are still not able to meet the required stake, they can ask employees to dilute theirs, but this seldom happens, and most of the time some previous investor dilutes his/her stake.

Consider when a company’s founders have 25% stake left with them and the new investors need 30% stake as opposed to their funding in that case founders might approach the employees to raise the remaining 5%.

It also sometimes happens that founders have diluted their stakes and left the company and it is controlled by the investors, and the employees are stuck in the company with their ESOPs, and then suddenly one day the company goes under, and the employees lose their wealth and a part of their salary.

So, a concept introduced to celebrate and reward loyalty of employees is currently used for capitalistic greed and gains.

Thanks for Reading!!