Employee Stock Option
The right to buy a stated number of shares in your employer at a fixed price, the strike price, once the option has vested. It is not a share and not a payment: it is worth something only if the company is later sold or listed above the strike, and costs cash to exercise.
Equity as an employee · 1 of 10Next: Strike Price
Why Employee Stock Option matters in interviews
Equity is the part of a startup offer that candidates understand least and are most likely to overvalue, and interviews for operating roles at venture-backed companies increasingly test it. A candidate who asks for the fully diluted share count, the strike price and the vesting schedule is showing the same discipline the company hopes to hire.
How it works in practice
An option is a right to buy shares at the strike price after it has vested. Vesting is usually over four years with a one-year cliff, so nothing vests in the first year and then a quarter vests at once. Until exercise, the holder owns no shares, receives no dividend and has no vote.
Three costs sit between the grant and any money. Exercising costs cash at the strike price. In some jurisdictions exercise creates a tax bill on the difference between the share’s value and the strike, due before the shares can be sold. And later funding rounds issue new shares, which reduces the percentage each option represents.
The pathway page on startup careers works one grant through vesting, dilution and an exit, with the arithmetic shown once: /pathways/startup-careers.
What candidates get wrong
- Reading the number of options as a value. 20,000 options in a company with ten million shares is 0.2%; in a company with two hundred million it is 0.01%.
- Ignoring the exercise window. After leaving, ninety days is a common limit, and a holder who cannot fund the strike and the tax in that time loses the equity.
- Assuming ordinary shares and preferred shares are paid alike. Investors’ preferences are paid first, so a sale below the money invested can leave employees’ shares worth nothing.
Employee Stock Option: frequently asked questions
What is an employee stock option?
The right to buy a stated number of shares in your employer at a fixed strike price once the option has vested. It is worth something only if the company is sold or listed at a share price above the strike, and exercising it costs cash.
Are startup options worth anything?
Sometimes, and the honest answer is that most are worth little or nothing. Value depends on the company surviving, on the exit price clearing the investors’ preferences, and on dilution from later rounds. Treat them as a possible bonus on top of a salary you could live on.
Keep reading
The startup pathwayRelated Startups terms
Equity as an employee: keep going
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