Stock Option

• Two types
  • Incentive Stock Options (ISO) for employees.
  • Non-statutory Stock Options (NSO) for board members/consultants.
• Restricted Stock Award
• 409A Evaluation, to make sure that you pay nothing but the long term capital gain.
• In the event of Change of Control, all the stocks will be vested immediately (as cash!) — You will pay income tax for it.
• ESOP = Employee Stock Ownership Plan

Parameters

• Grant date = the date you get the options
• Number of shares
• Strike price
  • You can buy the shares at this price
  • 409A evaluation, the Fair Market Value of the stock option.
  • The FMV would change every year (or more frequently). You would want to see FMV >> strike price.
• Issue date, ISOs are good for 10 years.
• Vesting schedule (negotiable)
  • 1 year cliff = can only exercise option after a year
  • 4 years monthly vesting
  • Liquidity event, all your vesting happens immediately, and all the shares are bought by the new owner
• Expiration date (e.g. 5 years, or 3 months after leaving)

Tax

• To receive favorable income tax treatment
  • 1 year from exercise date
  • 2 years from grant date
• ISOs are only taxed when you sell the options (or in Change of Control event)
• Alternative Minimum Tax (ATM)
  • Even lower tax
  • But you need to hold on to the stocks for extra period
  • If the stock price plummeted, you’re still liable to pay the same amount of tax.