A stock option is the most prevalent form of equity compensation for startups. Executive remuneration used to include cash in the form of salary increases and bonuses. However, thanks to stock option plans, employees can now benefit from the company’s success without costing them any of their hard-earned cash.
Employees must sign the Stock Option Grant Agreement if they need to purchase their shares someday. This agreement aims to implement an equity incentive plan and gives the option holder the right to buy the stock at a specific price in the future.
At Astrella, we help you determine what stock options are available, why a stock option grant agreement is beneficial, and what they should include.
What Types of Stock Options are Available for Startups?
As a startup, you may issue stock compensation to employees as incentive stock options (ISOs) or non-qualified stock options (NSOs). Their difference is when or how the employees must pay taxes and whether they should purchase the shares.
Incentive Stock Options (ISOs)
ISO is a unique stock option providing employees with tax advantages, such as avoiding paying taxes on the shares when purchased. Employees may also be eligible for a lower tax rate when they hold the stock for more than a year.
ISO expires after ten years from the time of issue unless you impose a post-termination exercise. Startups give ISO to high-performing staff who they want to keep on a long-term basis.
Non-Qualified Stock Options (NSOs)
NSO is a stock option that does not have tax advantages for employees. Employees have to pay taxes upon purchasing shares and selling those shares. Like ISOs, NSOs also expire after ten years of the grant date, and any claims not exercised by this time are considered valueless.
Why a Stock Option Grant Agreement is Beneficial
Startups can attract the employees they need to thrive and expand by offering stock options. They enable a business to compete for top talent by giving staff members and other service providers the possibility to own a piece of its future success.
Employees and consultants are more motivated to work harder and improve the company when they have a stake in the outcome. Private businesses that plan to exit may offer employee equity to promote employee retention, buy-in, and tenure.
What Should a Stock Option Grant Agreement Include?
The Stock Option Grant Agreement is usually composed of:
- Name of option – Refers to the option holder’s name
- A total number of shares in the company for employees to buy
- The type of option – Can either be ISO or NSO
- Exercise Price per share – The present fair market value of the company’s stock
- Date of the grant – The time the agreement is made effective
- Date exercisable – The date of purchasing the granted stock
- Vesting commencement date – The time employees earn the supply given to them
- Expiration date – The date the agreement is terminated
Equity Management and Expert Consultation with Astrella
Finding the ideal instrument to manage a company’s equity might be challenging in today’s fast-paced corporate environment. That is why you need equity management software to update your cap table every time you exercise a stock option grant.