Stock Option

Early-stage companies always face the same problem. Hiring the people they need means matching salaries that larger companies offer, and the bank account doesn't hold that. Investment money has to last eighteen months, so it can't all go into payroll. What's left is promising later what can't be given now.

Handing over shares directly was tried first, and problems came with it. On the receiving side, shares count as income at the moment they arrive, which means tax is owed on something that can't be sold — tax with no cash to pay it. The giving side has trouble too. More shareholders splits voting rights, and it becomes possible to receive shares in your first month and leave in your second.

A stock option sidesteps that by granting the right to buy rather than the shares themselves. Nothing transfers now; what exists is a promise that shares can be bought later at a set price. If the value never rises, nobody has to buy, so the recipient risks nothing, and the company adds no shareholders until someone actually exercises. Value only appears if the company grows, which aligns the holder with staying and building it.

Five items go into the grant, and once they're set, what the person eventually receives is computable.

1. Strike price — what they'll pay per share later, set at the per-share value on the grant date. Written as $4, they can buy at $4 no matter where the price goes.
2. Quantity — how many shares can be bought. Written as 5,000.
3. Vesting — how the promised quantity becomes theirs over time in service. Set vesting at four years and about 104 shares transfer each month, so leaving after two years takes half, 2,500 shares.
4. Cliff — the period that has to be completed before vesting begins at all. With a one-year cliff, someone leaving at eleven months takes nothing, while someone who reaches twelve months has a full year's 1,250 shares vest at once.
5. Exercise window — how long a vested right stays usable. Typically ten years from grant, shrinking to about three months on leaving the company.

The arithmetic is simple. Granted 5,000 shares at a $4 strike, with the share price later at $16, you pay $20,000 and hold $80,000 worth, a $60,000 gain. If the price sits below $4, you simply don't buy — and this line of your compensation is worth zero.

What's easy to miss is that exercising costs money. That $20,000 in the example is cash the person has to come up with. In a company that hasn't gone public, the purchased shares can't be sold either, so it amounts to tying up $20,000 and waiting. Tax attaches in two places, at exercise and at sale.

The most common setting is an offer. Base salary comes in below market and the gap gets covered with options. What the candidate reads at that point is total rewards — base, bonus, equity and benefits combined into one figure. The equity part is an assumed value rather than a current one, so depending on the per-share price used, the same offer totals anywhere from $38,000 to $54,000.

On the company side, grants come out of a portion set aside in advance: the option pool, the share of total stock reserved for employees, usually 10 to 15 percent. Grants can only come from inside it, so giving one person more leaves less for the next. Which is why most companies fix standard quantities per role and level.

Value actually materializes at an exit — a sale or a public listing that lets investors realize returns. Until then the figure is arithmetic, and a company that never reaches that point ends at zero. The three-month exercise window on departure attaches here too. Before a listing, someone leaving has to decide within three months whether to find cash for shares they can't sell.

"Base is slightly under market, but you get 5,000 options vesting over four years."

An offer covering the gap in equity rather than cash.

"Could you tell me the total share count? I need to know what 5,000 is as a percentage."

Pointing out that quantity alone says nothing about value.

"There's a one-year cliff, so leaving at eleven months means taking nothing."

Confirming the line where vesting starts.

Pagedeck reserves 12 percent of total stock as its option pool. Grace maintains a table of standard quantities by role and level, and negotiating outside the table doesn't happen, because that is how grants start diverging between people doing the same job. Vesting is four years and the cliff is one year for everyone.

With every offer, Grace supplies the three figures needed to do the math: current total share count, the per-share value from the most recent round, and the strike price. Without all three, a candidate can't work out what 5,000 shares represents. Leave them out and the candidate judges on quantity alone — then learns the real percentage after joining, and the trust goes before anything else does.

The most common mistake is reading a grant as having received shares. The document states a share count, so the reading is natural. But what was received is a right to buy, and becoming a shareholder means producing cash equal to the strike price later. At 5,000 shares and a $4 strike, that's $20,000. Someone who didn't know that, then gets told at departure to decide within three months, usually walks away from it. What's worth calculating at grant time isn't the quantity but the amount that will have to be found.

The other mistake is treating a large quantity as a good deal. 5,000 shares looks ten times better than 500. But without the company's total share count it means nothing. 5,000 shares of a company with 100,000 shares outstanding is 5 percent; 5,000 shares of a company with 50 million is 0.01 percent. The strike price matters as much. Set high already, no value appears unless the share price climbs past it. So quantity, total share count and strike price together are the minimum unit for reading this part of an offer.