Stock Options are the traditional way that venture-backed companies enable employees to build equity in a company.
A stock option is the right, but not the obligation, to purchase a certain stock at a certain price, the Strike Price for a certain period of time.
Your stock option grant will include language describing the key terms of the grant:
- Number of shares - usually higher for more senior people in the company and higher for people who start earlier when the company is riskier, than those who start later.
- Exercise price - is the price you have to pay to 'exercise' the option and purchase the stock. The exercise price is set by the board of directors based on a third party valuation of the company and its various securities under IRS Code 409a.
- Vesting schedule - The options are not given to you all at once. You have to earn into them over time. The typical vesting schedule is over 4 years with a 1 year cliff meaning that 25% of the options vest on your 1st anniversary and then 1/48th of your options vest monthly over the next 36 months.
The number of options you receive are counted in the 📝Fully Diluted Shares Outstanding. You need to know the number of shares outstanding to calculate what percentage of the company that you own.