What is a startup option

Firstly, exactly what is an option?

Work at a Startup September 16, Benjamin Beltzer is an early engineer at Berbix S18a startup building identity verification what is a startup option fraud deterrence as a service. He previously founded his own company and worked at both Apple and other startups. Ben wrote a great resource on understanding and evaluating stock options. If you want to learn more about stock options — including valuing them, questions to ask your employer and more. Read the full article on his Medium.

Equity 101 Part 1: Startup employee stock options

Find Ben on Twitter benbeltzer7and work with him at Berbix. Disclaimer: This is not legal or tax advice. Consult your own professionals before making any decisions. What is a Stock Option?

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A stock option is a contract that gives you the right, but not obligation, to buy a stock at an agreed-upon price and date. The price at which you can purchase the stock is called the exercise price, or strike price. So if your employer grants you options, you do not own shares.

Rather, you have the option to buy shares at the aforementioned strike price.

Startup Funding Explained - Seed Round and Stock Option Pool (Part II)

Doing so is called exercising your option. Understanding the Equity Component of an Offer There are a few key components to an equity offer that you should always look for.

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Number of Options. The number of shares you have the right to purchase. Percentage Ownership.

Types of startup stock options

Strike Price. The per-share price that you pay to exercise your options. Vesting Schedule.

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A typical vesting schedule is four years with a one-year cliff. There are plenty of other vesting schedules too. Some companies have a five-year vest with a six month cliff. When should I exercise my options? Exercising your options can be expensive, so deciding when to exercise is going to depend on your personal financial situation. The problem preventing many people from using this approach is that it often requires fronting a significant amount of cash to exercise your options.

In a cashless exercise, your employer or a brokerage firm will give you a loan to exercise the options, then sell the stock at market price immediately.

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You then use the proceeds from the sale to repay the loan. Typically the mechanics of the process of receiving the loan, selling the stock, and repaying the loan is hidden from the employee, and he or she will simply receive the proceeds after the whole transaction is complete.

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Early exercising is a good idea when you either have high confidence that the company will have a successful exit or the total cost to exercise is affordable. Sign up for weekly updates from Y Combinator. Popular Posts Sorry.

  • On its surface this was a pretty radical idea.
  • They can also be smoke and mirrors, or a pea under a whole bunch of walnut shells.
  • How to value startup stock options when comparing job offers

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Time to read: 8 minutes Not optional. A well designed option scheme will contribute significantly to attracting and retaining key talent and ensuring that value is attributed fairly to those that contribute. In this article we attempt to outline some of the critical considerations around establishing an option pool, particularly for those companies approaching a Series A investment. Firstly, exactly what is an option?