Ways that the company can issue stock options
- Purchase common stock as a founder everyone else subject to vesting.
- A grant of restricted stock at the formation of a company.
- A grant of stock options. Stock options are the right but not the obligation to purchase shares at the strike price (usually set by the 409a valuation and approved by the board). Usually the stock options vest over 4 years with a 1 year cliff which means you vest the shares monthly after your first twelve months with the company when you vest 1/4th of the grant.
- Warrants. Are the same as stock options but can be given to a company like 📝Assembled Brands. AB gets warrants when it makes a loan.
- Restricted stock grants from a public company, say Google. As an employee of Google you will get 100 shares of Google and as soon as they vest you pay the taxes on them with real dollars and you can also sell the shares for real $.
Hypothetical grant
- 4800 shares
- Strike price $0.10 per share
- Vesting monthly after a 1 year cliff. Meaning 1/4th of the shares vest on your 1st anniversary with the company and 1/48th of the shares vest monthly after that.
After a year, you can go into Carta and exercise 1200 shares by paying the company $120. The good news is that the "clock" starts on long term capital gains tax. Meaning after 12 months of holding the stock you just bought you can sell and be eligible for the capital gains tax rate (which is usually lower than your ordinary income rate.)
Founders & early executives can sometimes negotiate "a loan to early exercise." In this case, the company would loan the grantee $480, the grantee would use that $480 to exercise the stock options. Carta would reflect that the grantee now holds actual restricted stock that will vest on the same schedule as the options. Obviously this would be more important if it were 600,000 shares and the strike price is $0.50 which could happen as the company approaches a Series B.