How Stock Options Work Employee stock-option programs are typically authorized by a company's board of directors (and have historically been approved by the shareholders) and give the company…
Employee stock-option programs are typically authorized by a company's board of directors (and have historically been approved by the shareholders) and give the company discretion to award options to employees equal to a certain percentage of the company's
shares outstanding.
Options give employees the right to buy a certain number of their company's shares at a fixed price for a certain period of time, usually
10 years.
That price, usually the market price of the stock on the date the
options are granted, is called the "strike price."
Options usually begin vesting after one year and vest fully after four years. If an employee leaves the company before his or her options
vest, they are canceled.
Once an option is vested, the employee can then "exercise" it--that is, purchase from the company the allotted number of shares at the strike price--and then either hold the stock or sell it on the open
market.
The difference between the strike price and the market price of the shares at the time the option is exercised is the employee's gain in the
value of the shares.
When the option's strike price exceeds the market price of the stock,
the option is technically worthless, or "under water."
When the market price of the stock exceeds the strike price of the
vested option, the option has value, or is "in the money."
When an employee exercises an option, the company must issue a new share of stock that can be publicly traded. While the employee pays the company the strike price for that share, the company's
market capitalization grows by the market price of that share.
Having more shares outstanding dilutes (or reduces) earnings per share--and thus the value of shares held by investors who already
own the stock.
To forestall dilution, one of two things must happen: earnings must increase commensurate with the increase in outstanding shares, or the company must repurchase shares on the open market to reduce the
number of outstanding shares.
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Comments
It's from 2007; if someone showed you this today, as what you needed to know as a hire, they'd be scamming you.
This seems like only the "first slide's" worth of what a tech employee needs to know about stock options, and not the most important things.
It's also worded imperfectly in parts, with the effect of being misleading.
If you start by looking at the lede and first paragraph, it's unclear who this is for, and seems more like a child's "book report", with no regard for the reader, nor sufficient understanding of the space that's relevant to the reader.
Perhaps this wasn't garbage in 2007, but I'm flagging it in 2025.
By anotherhue 2025-08-1320:45 Couldn't agree more. The tech boom made a lot of people rich, you might call that egalitarian, and believe that you too could share in the wealth.
The financial class call that uncaptured value, and they have since altered the terms to prevent that. Naturally the company still wants to pretend otherwise so when you hear the TC you add USD to timebomb banana bucks and come out with a USD total.
If you want equity start your own business. You are not in a position to get any of theirs.
Edit: if you get RSUs and you can liquidate without lockup then that's much better. But still worse than cash.
By lurking_swe 2025-08-1322:361 reply That’s too broad of a statement. For a startup, YES, i agree. It may end up at $0 if the company goes bust. And that’s very common - especially in tech.
However there are some publicly traded (and fairly large) companies that have been around for a while, that also offer stock options (NQSOs) to their employees. Typically they get to choose between RSUs, NQSOs, or a mix. In these cases options are not worthless because the risk of the company going bankrupt is very slim.
By daveguy 2025-08-151:02 Yeah, I was going to go into all that crap, but they're all still just options to buy at whatever market price you start at. Market go up. Market go down. Just consider stock options to be worthless when negotiating. I'm not saying don't accept them, just don't factor them in as "compensation". Factor them in as chips already laid on roulette table, at best.
By neilv 2025-08-1319:03 [dead]
By yohannparis 2025-08-1319:431 reply Where can I find up to date information on a stock-option?
By xandrius 2025-08-1321:50 2 rules of joining a startup:
1. If you can get assured bonuses instead of stock options, pick that unless it's going to be a unicorn.
2. It's not going to be a unicorn.
By Sohcahtoa82 2025-08-1318:39 Not to mention how much it leaves unanswered.
What happens to your options if the company goes public or gets acquired before you exercise?
What if you exercise but decide you want to sell but the company isn't public?
I know that we're writing on the Y Combinator-sponsored forum, but after the events of the Windsurf/Google fiasco, the exits of Instacart, and how the acquihire is scaling, is there any indication that SO is a really good incentive nowadays?
By jiveturkey 2025-08-1319:47 I can cherry-pick examples also. Figma, CoreWeave, Voyage AI.
Today, yesterday, stock options have always been a lottery ticket.
