Stock options

Anatomy of a stock option grant

A typical option grant includes:

• Number of shares the option covers
• Strike price, set at or above the fair market value of the shares on the grant date (in the US, supported by a 409A valuation)
• Vesting schedule, typically 4-year vest with 1-year cliff: nothing vests for the first year, then 1/4 vests at the 12-month mark, then monthly or quarterly through year 4
• Exercise window, typically 10 years from grant, shortened to 90 days after termination of employment
• Acceleration provisions, defining what happens on a change of control (single-trigger acceleration, double-trigger acceleration)
• Tax category, in the US (ISO or NSO)

The option pool

Options are granted out of a defined pool of shares reserved for the equity incentive plan. The size of the pool is set by board and shareholder approval at plan adoption and is typically expanded at each priced financing round. Common pool sizes:

• Pre-seed / seed: 5–10% of fully diluted
• Series A: 10–15% of post-money fully diluted (often topped up at the round)
• Later stages: 5–10% top-ups as needed for hiring

Granted-but-unvested options dilute holders on a fully diluted basis even before they vest, which is why the option pool is one of the most contested items at every financing round.

What can go wrong

Three failure modes are common:

• Grants outside the pool. The board grants options for which there are no reserved shares. The grants are invalid until the pool is expanded.
• Strike price below FMV. In the US, this triggers IRC § 409A penalties for the optionee. A current 409A valuation is mandatory at each grant date.
• Lost grant records. The option agreement is in an email or a shared drive, not the minute book. When the optionee comes to exercise, the corporation can't produce the grant.