About half of all professionals who receive stock options say they don’t fully understand how they work. This article will answer all your questions – from conceptual basics (How do stock options work? What is vesting? What are leaver provisions?) to the specifics that help you understand your stock option package (How much are my stock options worth? What information do I need from my (future) company?). Scroll down for the full list of questions this article answers.

From early-stage start-ups to publicly listed corporates, most (Tech) companies that want to attract top talent offer their employees stock options or some other type of share-based compensation.

And that’s not just the case in the US anymore. Compensation policies in the UK and Europe have long started to incorporate stock options, RSUs, ESPPs, etc. According to Ravio, >2/3 of European Tech companies are offering some type of equity compensation to their employees.

Stock options - or equity more widely - have become very common as compensation tools in the UK, France and Germany.

But very often, the people who receive equity don’t really understand how it works. Especially stock options tend to be either under-valued (“I don’t know what this is and I don’t really care about compensation other than salary”) or over-valued (“If I stay here for 3 years, I’m pretty sure I’ll be a millionaire”).

This article will answer all your questions around stock options. It will start by addressing questions around general concepts like How do stock options work? What is vesting? What are leaver provisions? and then go into more practical questions about your stock options, like How much are my stock options worth? What information do I need from my (future) company? Can I negotiate my stock option package? etc.

If there’s a specific question on your mind, just click on the relevant section below.

The answers to all your questions…

Conceptual questions about stock options

Practical questions about your stock options

What are stock options? Are they a type of equity?

Stock options give you the right (or the option) to buy shares in a company at a pre-defined price, at a certain time in the future.

Equity refers to ownership in a business, i.e. having shares in the business, benefitting from dividends the business pays, being able to go to the annual shareholder’s meeting, etc. So, if you buy shares in say, Google, you own equity in Google and you’re a shareholder.

As per the above, stock options aren’t shares yet but they give you the right to buy shares in the future. So, while they’re not technically equity, they are considered part of equity-based compensation as they can be converted into equity in the future.

By the way, while we’re talking about terminology, we’ll use the terms share and stock synonymously in this article. So, when it says stock options, you could also read this as share options. Again, they are options to buy shares, so that kind of makes sense.

What are RSUs, ESPPs and ESOPs? What’s the difference to stock options?

RSU stands for Restricted Share Unit. You can see that it doesn’t include the word option – that’s because RSUs are actual shares. In other words, if you receive RSUs, you already become a shareholder of the company, and you own shares – not just the right to buy them in the future. The difference to “normal” shares comes from the R, i.e. the restrictions. These usually apply to (a) the company getting some or all of the shares back if you quit before the end of your vesting period (see here for more detail on vesting); and (b) the point in time at which you can sell the RSUs.

ESPP stands for Employee Stock Purchase Plan. Again, no options, just stock. Companies can set up an ESPP to allow their employees to buy shares at favourable conditions. For instance, they could allow them to buy shares at a lower price than what they’re currently worth. Or to buy shares directly through payroll, often with tax savings. Every ESPP could look slightly different but again, these are programs to allow employees to buy actual shares. No options are involved in the process.

ESOP stands for Employee Stock Ownership Plan and is, in essence, pretty similar to ESPP. The key difference is that, under an ESOP, you don’t have to buy shares from your own salary but get them directly from the company. ESOPs are more common for privately-held companies while ESPPs are more common for publicly traded companies.

Stock options, on the other hand, are a completely different concept from all of the above. They give the owner the right to buy shares at a pre-defined price, at a future date. If your company gives you 5,000 stock options, that means that – at a certain point in the future – you’ll be able to buy 5,000 shares at the price that the company has defined (the strike price or exercise price). That means that if you hold stock options, you don’t hold actual shares. You only have the option to buy shares at a later point in time. You’re not a shareholder just yet. For the avoidance of doubt, this article is fully focused on stock options.

How do stock options work?

Consider a start-up with a valuation of £5 million and 5 million shares in circulation. Each share is worth £1. The start-up gives new employees stock options so they can acquire shares at the current value of £1 at a future point in time (£1 is the strike price or exercise price in this scenario). At the time the options are granted, they’re worth zero – being able to acquire something that is worth £1 for £1 doesn’t have immediate value. And because they’re not worth anything when they are granted, you don’t have to pay tax on them.

If the start-up achieves explosive growth and exits for £500 million a few years later, each of the 5 million shares is suddenly worth £100 (this simplified example ignores the concept of dilution). So, if you still have your options, you can now buy something that is worth £100 for £1 – i.e. you make a profit of £99 for each stock option (you buy every share at £1 and immediately re-sell it at £100). If you have 30,000 options, that’s worth £2.97M.

Why do some companies award stock options while others award RSUs?

Larger (public) companies tend to offer their employees RSUs, while smaller (private) companies (i.e. start-ups / scale-ups) tend to offer stock options.

Start-ups assume that their share price will increase substantially in a relatively short period of time. Therefore, stock options are a way to let employees participate in the growth of the company. They don’t trigger taxes at the time they’re granted, and they only really become valuable if the company does well.

Larger corporates, on the other hand, will not typically experience rapid, explosive growth in value. Therefore, it doesn’t make sense to give you options, which are only interesting in the case of such explosive growth. Instead, they use the straightforward tool of RSUs to simply give their employees shares as part of their compensation.

Often, these shares are publicly traded and therefore, employees can easily sell them, i.e. convert them into cash. This is very different to stock options from privately-held companies, where – even if employees have converted the options into actual shares – they still need to wait for a moment when they can actually sell the shares (a liquidity event), as they’re not traded on a stock exchange.

As there’s a clear value associated with an RSU, it is usually taxed as income when it is awarded to an employee (though there are lots of different tax schemes to make it more tax-efficient).

In terms of why companies award their employees with equity in the first place, both stock options and RSUs serve similar purposes…

  • Motivate employees to do their best work: the value of both RSUs and options increases with the share price of the company. So, in theory, by owning these instruments, you should have an incentive to do whatever you can to help the company grow in value.
  • Lock employees in: because of the restrictions on RSUs and because stock options only gain value over time, employees have an incentive to stay with their company until they can actually get a pay-off. So essentially, they’re used as a retention tool. This is also the reason why many large companies award RSUs on an annual basis – just as the restrictions on your previous batch of shares lapse, you get a new batch with fresh restrictions and a renewed incentive to stay put.

From here on out, we’ll focus purely on stock options and leave RSUs to the side.

How do companies decide how many stock options I get? And what are my options worth?

Usually, when start-ups raise money, they agree with their investors a pool of equity that is set aside for employee awards. This pool is typically somewhere between 5-15% of all shares.

Let’s consider an example of an early-stage company that is valued at £5 million, with 5 million shares in circulation and which has set aside 10% of their equity for employee awards. At their current valuation, this 10% pool equals a value of £500k. However, if they manage to achieve a valuation of £25 million in 2 years, the same pool would have a value of £2.5 million. Therefore, they might decide to use 5% out of the 10% for hires up to the next funding round and keep the remaining 5% reserved for hires after that. That means that right now, they now have £250k in equity available for new hires.

From here, there are multiple approaches the company could take to determine how many stock options to award to each individual new hire. For instance, they could decide to only give options to absolute key hires, of which they expect to have 5 and so give each of them 1%.

The most common approach, however, is to decide they want to give options to everyone, and to award them based on a percentage of base salary, thereby ensuring that more senior hires (who have a higher salary) get more options than more junior hires (who have a lower salary). Therefore, if you can negotiate a higher salary, you will often also get a higher stock option package.

For our company, this would work as follows. They plan their hiring over the next 2 years and determine they want to hire 10 people, with salaries between £50-100k, at an average of £75k. This means a total new salary mass of £750k. They have £250k in equity available, so they decide that every new hire receives 1/3 of their salary in stock options when they join. Therefore, if you join on a salary of £90k, you’ll be awarded a stock option package of £30k.

Now very importantly, keep in mind that the value of your stock options isn’t actually the amount calculated above. As we explored, at the time you get your stock options, their value is zero, because you don’t get any shares, you just get the right to buy shares in the future at the current price.

However, very often companies will communicate this absolute “amount” to you. In the example above, the company most likely won’t be shy to tell you that you get “£30k worth of stock options”.

Again, you don’t. The £30k is not the value of your stock options today. Instead, it describes the amount of equity you would own if you could exercise these options right away (which you can’t). You’d have to pay £30k to exercise them so if anything, right now the £30k is a cost and not a value. To really understand the attractiveness of your stock option package, you need quite a bit more information – all of which we’ll cover here.

Now, there is one interpretation of the amount that is communicated to you which is actually valid. Every time the company increases its per-share value by its current per-share value, this is the additional amount your options are worth. I.e. if the companies’ shares are worth £1 per share now and you have an option package of £30k, this means that every time the company increases its share price by £1, your option package gains £30k in value.

If our company goes from being worth £1 per share to being worth £2 per share and you exercise your stock options, you’ll buy them at £1 – your strike price or exercise price – and sell them at £2. You have 30k options so you’ll make £30k. If the share price goes up to £3, you’ll make £60k, etc.

The chart below illustrates this relationship between share price, exercise price and value. As long as the share price is lower than or equal to your exercise price (which is usually the case when you get your stock options), the value of your options is zero. However, as soon as the share price starts to increase beyond the exercise price, you’re “in the money” (meaning your options are worth more than zero).

A chart that shows how the value of stock options increases with the price per share

So again, your options are worth zero when you get them. But every time your company increases its per-share value by the amount it was worth when you got your options, the value of your options increases by the amount that was communicated to you.

What is a strike price / exercise price and how does it work?

The exercise price of your stock options is the price at which you can buy shares in the future. It is always defined at the time that your options are awarded.

In most cases, the exercise price will be equal to the company’s price per share at the time that your options are awarded. This way, the options have a value of zero when they are granted (because you get the right to buy something that is worth X for X) and therefore giving them to you doesn’t trigger any tax.

This is also why it can be so lucrative to get into a successful start-up early on. In our above example, you joined the company at a valuation of £5 million, with 5 million shares of value £1 circulating. Your 30,000 options had an exercise price of £1. So if the company gets sold for £500 million a few years later, each share would be worth £100 and you’d make £2.97M (a profit of £99 on each of your 30,000 options).

If, however, the company had already had a valuation of £100 million with 5 million shares circulating when you joined, your stock option grant would have been different in 2 ways:

  • You would have received fewer options (because of how companies allocate options – see here)
  • Your exercise price would have been £20, rather than £1 (because the valuation at the time of award would have been £20)

Therefore, the profit you would make on each of your options would be smaller (because of the higher exercise price); and you would make this profit on a smaller amount of options.

Can the exercise price be different from the current market value per share?

So far, we’ve looked at the standard scenario, where your exercise price equals the price per share at the time of the option grant. The value of your options is therefore zero when you get them.

We have explored that this zero-value is by-design so you’re not taxed for receiving your stock options.

In practice, however, the exercise price could be different from the current market value:

  • It could be higher: this is very unusual but your company could set the exercise price higher than what shares are actually worth at that moment. The value of these options is still zero – you’d have the right to buy something for £1 that is currently worth 50p; and it would take longer for your options to get “into the money”.
  • It could be lower: this usually happens when the tax authority under-estimates the value per share of the company. They say “We believe this company is worth 50p per share so if you award stock options with an exercise price of 50p, they have a value of zero and won’t be taxable”.  In reality, however, you might believe that the “true” value is higher than what the tax authority believes.

The latter situation can happen because – unlike a publicly traded company which has a clear share price – it’s actually really difficult to value a privately-held company, especially if it’s still loss-making.

The valuation technique of the tax authority varies by country and often by the stage of the company but typically, they take one of two approaches:

  1. Valuation based on fundamentals: basically, they look at how big of a profit the company is turning and then work out a value based on that. Turns out, most start-ups don’t turn a profit but a loss and therefore, the valuation comes out as zero.
  2. Valuation based on last funding round: rather than looking at fundamentals, the tax man can look at the latest market price, i.e. what investors paid for each share the last time the company raised money.

Both valuation techniques can lead to an under-valuation of the company. In case (1) because clearly the value isn’t actually zero (otherwise, why would anyone invest); in case (2) because since the last funding round, the intrinsic value of the company should have increased, even if no shares were bought or sold to prove it since then. The company may even already be in early discussions for a new funding round at a higher price per share.

Sticking with our previous example, consider the following scenario. The company you’re joining has raised money at a valuation of £5 million and a price per share of £1 a year ago. The tax authority confirms that it still considers the value to be £1/share. Therefore, you get your 30,000 options at an exercise price of £1. However, you know that it’s highly likely that the company will soon raise a funding round at a valuation of £5. So, while officially your options are worth zero and you don’t pay tax, you know that the market value of the company has increased to £5/share and the value of your options will jump to £4 per option (value of £5 minus exercise price of £1) as soon as the funding round is closed.

You got in at a very good time – had you joined after the funding round, you would have had a higher exercise price and you would probably also have received fewer options (as explored above).

So, while the value of your stock options will officially always be zero when you get them, it could practically be higher – this is typically the case if you can get into a company just before their next funding round and thereby take advantage of their previous valuation (which you know has gone up in the meantime, even if it’s not official yet).

What does vesting mean? How does it work?

When companies give you stock options, they want to guard themselves against a scenario where you join them, take the options, leave a few weeks later, keep your options and exercise them when the company gains in value. Essentially, they want to avoid giving equity to people who don’t contribute to the company’s success.

One of the mechanisms to prevent this is to put in place a vesting scheme where your options are unlocked throughout your tenure with the company.

Typically, there’s a 4-year vesting period, which means that when the four years are over, you get all your stock options. Within that period, vesting is typically linear, meaning that if you leave halfway through your vesting period, you have unlocked half your stock options.

Often, options vest on a quarterly basis, meaning that you need to complete a quarter to unlock the stock options for those 3 months. Some (employee-friendly) companies change this to monthly or even daily vesting.

There’s also a concept called accelerated vesting, which is typically applied when the company is sold. The idea is that – if there is an exit while you’re still in your vesting period – there’s an acceleration of your vesting so that, even if you haven’t completed the 4 years, you already unlock all (or a larger portion of) your stock options and fully benefit from the exit. The idea here is that it’s not your fault that you couldn’t complete your vesting period so you should be able to take advantage of all or most of your stock options.

What’s a cliff? How does it work?

With a vesting scheme as described above, you could theoretically still join a company, leave after 3 months and then get the (few) stock options that you’ve vested over that very short period of time. Companies don’t like that because they don’t want too many shareholders with small stakes in the company.

Therefore, they introduce a “cliff” in your vesting schedule, which is essentially a minimum amount of time you have to stay before you unlock any of your options. Typically, the cliff is 1 year, meaning that if you leave after less than a year, you won’t get any stock options at all. Once you’ve been there for a year, you’ll unlock 25% of your options immediately (assuming a 4y vesting agreement). After that, vesting is usually linear and quarterly, as in the illustration below.

Stock options with a cliff in their vesting schedule start getting unlocked after an initial period of usually 1 year

What are leaver provisions?

Leaver provisions are an often overlooked reason why your stock options may turn out to be worthless.

They stipulate scenarios in which – even though you have vested stock options – you forfeit your ownership of the stock options / the company may prevent you from exercising them. These scenarios are defined as “bad leaver” scenarios – if you leave because such a scenario occurs, you’re a “bad leaver” and forfeit your options.

Some of these scenarios make sense and create the right incentives – especially those that are focused on gross misconduct or malicious acts against the company. Say, for instance, you get fired because you groped your colleagues; or because you intentionally sabotaged the company in some way. It makes sense that if you behave really badly, the company wants to retain the right to prevent you from getting cheap shares.

On the other end of the spectrum, there are situations that would normally always be considered “good leaver scenarios”, meaning you leave the company but can keep your vested stock options. The main examples of such good leaver scenarios include retirement or being made redundant without cause. It would be pretty strange if your company could tell you “I know you’ve just hit retirement age but if you don’t keep on working, you’ll miss out on all your equity”.

And then there’s all the stuff in between these clear-cut extremes – most importantly, specially voluntary resignation, i.e. you resigning from the company simply because you don’t want to work there anymore. Most companies will try to define this as a bad leaver scenario because they want to incentivise you not to leave. They’ll typically try to include some wording that says “it’s at the discretion of X” to determine whether you’re a bad leaver if you resign. This way, they keep their options open – they’re not saying you’ll definitely be a bad leaver if you resign but they keep the possibility hanging over your head.

One company I worked for pushed it to the limits and had a leaver provision that said that the CEO of the company could – at his sole discretion – make anyone a bad leaver, no matter why they leave (i.e. also if they’re being made redundant). Awesome.

Now, importantly, companies do have an incentive not to randomly hoodwink employees who leave for very valid reasons. After all, if they get a reputation for doing so, other employees will see that their options are worthless in most scenarios and get de-motivated.

That said, VCs can be really harsh and – even if you have a great relationship with your Founder – they might push them to deem you a bad leaver simply to (a) dissuade you from leaving or (b) prevent dilution in favour of someone who is leaving.

What’s also tricky about leaver provisions is that they typically apply to all employees of the company, making them nearly impossible to negotiate unless you’re a super key, super senior hire.

Overall, leaver provisions are absolutely crucial to understand. It’s great if you get a huge stock option package with favourable vesting conditions; but if you can never actually leave the company without losing those options, they may feel more like handcuffs than a lottery ticket. Never, ever accept an offer that includes stock options without understanding their leaver provisions. Read the fine print!

When can I exercise my stock options? What is a liquidity event?

Theoretically, you can exercise your stock options at any point in time (as long as they have vested).

However, keep in mind that when you exercise your stock options, you’ll have to pay up – you’re simply buying shares at a pre-defined price but you’re very much still buying them with real money. If you have 30,000 stock options at an exercise price of £1, you’ll need to pay £30,000 to buy the shares.

Sure, it might be that the company valuation is £5 per share and so in theory, your £30k investment is worth £150k. But if you exercise your stock options at a random point in time, you will most likely simply not be able to sell them because nobody wants to buy them at this point – or even because there are restrictions in place on when you’re allowed to sell them. Remember, your company is still privately-held so you can’t just sell your shares on an exchange.

So, the problem with just exercising your options is that you have to pay upfront, without knowing when and at what price you’ll actually be able to sell your shares. The company could deteriorate quickly and lose most of its value, making it a risky move.

That’s why usually you’ll want to buy your shares during a liquidity event like an IPO, a (partial) sale of the company or even a fresh round of funding where investors want to scoop up extra shares. This way, you buy them and immediately re-sell them – giving you zero risk and a sure profit.

Do I have to exercise my stock options when leaving the company?

Let’s assume you’ve vested all your stock options, have resigned and been deemed a good leaver, meaning you’re allowed to keep all your vested options. In theory, you can now hold on to your stock options until a liquidity event occurs and then cash in.

However, most companies place restrictions on how long after leaving you can exercise your stock options. They might say that, if you leave the company, you have to exercise your options within 6 months or within a period of time shorter than your tenure with the company.

Now, you may get lucky and a liquidity event occurs within that timeframe. However, if it doesn’t, you have to make a choice about whether to…

  • Exercise your options: paying upfront and hoping you’ll be able to sell your shares at a higher price in the future
  • Let your options lapse: simply don’t do anything and lose the right to buy shares for your stock options

The issue is that, even if you’d like to do the former, you may not have the cash available at this point in time or you may find it too risky, given that the company could still fail. That’s why, according to Carta, only about 1/3 of in-the-money stock options are exercised before they expire.

Hence, stock options often end up being worthless in practice – by the time you leave the company and need to exercise them, you can’t or don’t want to spend the cash to do so. They can also be real golden handcuffs when your company is super successful. You may want to leave the company for whatever personal reasons but feel unable to do so because you’d be losing out on a potentially huge pay check.

Stock options work out best where…

  • You’ve joined extremely early and therefore have a very low exercise price. This means that your investment will be small.
  • You stick with the company until exit, so that you don’t have to pay anything upfront and simply cash in on the share value at exit minus your exercise price.

Does the type of exit for the company matter for my stock options?

Normally not. It doesn’t even have to be a full exit for you to be able to cash in on your options – any liquidity event (IPO, (partial) sale, fresh round of fundraising) will do if you have fully vested options and there’s demand from investors to buy shares.

How do taxes on stock options work?

In the basic case, it’s pretty simple.

When you receive your stock options, they have no value, so you pay zero tax (see above).

When you exercise your stock options, you pay Capital Gains Tax (CGT) on your profit, i.e. on the value of the shares you now hold minus the exercise price. Again, this is why it’s a lot better to exercise your stock options when you can immediately sell them – because you don’t just need to pay your exercise price but also taxes. CGT for selling shares in the UK is currently at 24%.

So, if you have 30,000 options with an exercise price of £1 and you sell your shares at a price of £5, you have a profit of £4 per share, i.e. £120k. This amount is taxed at 24%, i.e. you pay £28.8k in taxes when exercising your stock options. If you had an opportunity to immediately sell your shares, this leaves you with a cash profit of £91.2k.

Now, there are all kinds of tax rules and incentives that can make the situation a whole lot more complex and potentially advantageous for you. These depend heavily on the jurisdiction you’re in.

In the UK, there are 2 main concepts / schemes to be aware of:

  • Business Asset Disposal Relief (BADR): this is essentially a lower rate of Capital Gains Tax for entrepreneurs (it used to be called Entrepreneur’s Relief). If an entrepreneur sells a business and meets certain eligibility criteria (e.g. having owned the business for a certain amount of time), they only pay 14% tax on their gains (increasing to 18% from 6 April 2026) as opposed to the standard rate of 24%.
  • Enterprise Management Incentives (EMI): this is a mechanism that allows businesses to offer stock options to employees with 2 main benefits:
    • If options are exercised but shares not sold at the same time, no CGT has to be paid. Instead, taxes are only paid when shares are sold.
    • Employees benefit from the lower tax rates under BADR (see above) when selling their shares from exercised stock options

There are all kinds of other tax structures and mechanisms and if your situation is slightly more complex – if you stand to make a lot of money from options, you’re moving countries, etc. – it’s usually worth speaking to a tax advisor and getting into the nitty-gritty of it.

What is dilution?

Dilution means that the percentage of the company that you own after getting your shares will become smaller as more shares are added to the total pool, i.e. your stake in the company will dilute.

Consider a situation where you receive 30,000 stock options with 5,000,000 shares in circulation. That means that, when you exercise your options, you’ll own 0.6% of the company, right?

Theoretically, yes but, realistically, no. That’s because by the time you exercise your options (often 4+ years later), there could be 20,000,000 shares in circulation as the company has raised additional funding (and created new shares to do so) in the meantime. Therefore you’ll only own 0.15% of the company. So, if the total valuation at exit is £100M, you won’t actually make £600k but only £150k because the percentage of the company that you own has been diluted.

This is a completely normal process – companies always issue more shares when they raise more money or when they want to give additional stock options to (new) employees. In principle, all shareholders – incl. Founders and VCs – experience dilution equally so incentives are perfectly aligned. The only difference between you and a VCs is that the latter often has the right to invest additional money in subsequent funding rounds, thereby keeping their ownership stake constant. You don’t have that right but chances are, you wouldn’t want it anyway, as the whole point of stock options is to not have to make an initial investment.

Because of this concept of dilution, what really matters is that the company increases its value per share, i.e. that the valuation of the company increases more quickly than the number of shares in circulation.

Practical questions about your stock options

My offer says I get stock options worth £30k – is that really the value?

No!

The following example illustrates how they come up with this number…

  • The company is valued at £5M with 5M shares outstanding, i.e. a share price of £1
  • They decide to give you 30k stock options
  • As the share price is £1, they multiply this with 30k options and say “your package is worth £30k”

However, this number purely describes the amount of equity you would own if you could exercise these options right away (which you can’t). And even if you could exercise them, your exercise price would be £1, meaning you’d have to pay £30k to get equity worth £30k. In other words, the options are worth zero at this point.

If anything, the number that is communicated to you is not the value of your options but the cost of your shares. Once you exercise the options, you will have to pay £30k to get your shares.

Another interpretation of the amount that is communicated to you is the following – every time the company increases its per-share value by its current per-share value, it is the additional amount your options are worth. I.e. if the above company managed to double its per-share value of £1 to £2 then your options are indeed worth £30k (because you can buy 30k shares at £1 and sell them at £2). If they add another £1, you make another £30k. Refer back to this chart for an illustration of this principle.

The problem is that very often, you’ll get your job offer presented to you by your hiring manager or by HR. And very often, they don’t actually understand stock options in detail themselves. So instead of explaining the package properly, they often just throw some stock options at you and tell you they’re “worth £30k”.

How do I know whether the # of options I’m being offered is a lot?

Say you got offered 30,000 stock options – sounds great but what does that mean, really?

From the previous section, you know that – at the very least – you need to know the current per-share value of the company (usually equal to your exercise price). As in the above example, if the share price is £1, getting 30,000 stock options means that if the company adds £1 to its share price, you’ll make £30k.

That’s already pretty good to know but ideally, you’d also like to understand the total valuation or the total number of shares in existence.

That’s because, depending on how high the company’s total valuation already is, the scope to double / triple / quadruple / 100x its share price differs.

A Seed-stage startup is typically valued at around £10M – if they become a unicorn, they would add this value to their valuation 99 times. Sure, there may be lots of dilution but even if they 3x the number of shares, that’s still an increase of 33x in terms of per-share-value.

On the other hand, if you get stock options from a company that’s already valued at £1bn, they’ll need to become one of the largest companies in the world for you to make a similar profit.

Another way of looking at it is this – with your 30,000 stock options (each share valued at £1), you’d own 0.3% of the company when you exercise all your options if the valuation is £10M. However, you’d only own 0.003% of the company if their valuation is already at £1bn.

Therefore, to know whether what you’re being offered is “a lot”, you want to find out 2 things initially:

  • What’s the current per-share valuation / exercise price? They’ll definitely be able to tell you this / the exercise price will be in your contract.
  • How many shares are there in total / what’s the total valuation? They may be reluctant to tell you this but – at least with VC-funded companies – you can usually get a good idea just from googling their latest fundraise.

What do I need to know to understand the value of my stock options?

To really be able to gauge the value of your stock option package, you want to understand all of the following:

  • # of stock options you receive
  • Exercise price / current valuation per share: you also want to understand whether there’s a difference between the two (see here)
  • Total valuation of the company
  • Total # of shares outstanding
  • Vesting conditions & cliff: the shorter the vesting period and the shorter the cliff, the better
  • Leaver provisions: the clearer and less restrictive, the better
  • Restrictions: if you leave the company as a good leaver, how much time do you have before you need to exercise your options?
  • Exit timeline: when do the founders / owners want to sell the business? Will there be other liquidity events along the way?
  • Tax schemes: does the company issue stock options using a tax-advantageous mechanism? What exactly is the tax advantage?

Only if you know all of the above will you be able to make an informed decision about how much value to assign to your options. Make sure to ask these questions when you receive / when you’re negotiating an offer for a new job. You HAVE to read the fine print!

If you need some guidance on how to negotiate, check this out.

Who in my (future / former) company understands stock options?

Unfortunately, most companies don’t do a great job at educating their (future) employees about their stock option packages. According to Carta, 61% of employees think it’s important for employers to help them understand their stock options but only 37% of companies provide any equity education at all.

So, there’s a very good chance that the person who gives you your offer (your future line manager or HR) has a very rudimentary understanding of stock options themselves.

To be fair, it’s a pretty complex topic and your hiring manager and HR very likely have a million other things on their mind. Plus, most people don’t challenge their future employers about the points you need to understand shown above – so it’s not something they usually have to deal with.

It really is important not to just go along with it, though. Don’t be afraid to ask stupid questions and don’t just drop it if they don’t have a good answer for your questions right away. No company can expect you to appreciate your stock option package and see it as a valuable part of your offer if they don’t give you the information you objectively need to understand its value.

I recommend you identify the person within the business that really understands the dynamics of stock options and can explain the intricacies of the company’s programme to you. Often that’s the…

  • Founder
  • COO / Head of Operations
  • CFO / Head of Finance
  • General Counsel or external lawyers
  • CHRO

If you work for a company that struggles with (a) communicating the value of your equity rewards to candidates and/or (b) the understanding of stock options within your business, feel free to get in touch – I regularly run training sessions on the topic and genuinely believe that it’s important for employees to understand the real value, upsides and limitations of their stock option packages.

A company has promised to give me stock options at a later point in time – is that an issue?

It could be.

Often this happens in early-stage companies where the company hasn’t actually gone through the process of setting up a stock option programme yet and therefore can only promise you future options rather than award you stock options right away.

While that’s definitely better than getting no stock options at all, a couple of problems could arise:

  1. Exercise price / per-share valuation could change: you want your exercise price to be as low as possible so that you have to pay as little as possible when exercising your options. Another way of looking at it is that you want the per-share valuation to be as low as possible when you receive your options so that you have more upside for the share price to double / triple / 100x. However, if the company raises more money between the time they hire you and the time you get your options, your exercise price will most likely increase (because the tax authority will assign a higher value to your company) and you’ll get your options at a higher valuation, i.e. with less upside.
  2. Your vesting could start later: typically, vesting and cliff start when you get your options. This is fully negotiable, however – so you should negotiate with your company that, when you do get your stock options, your start date for vesting date will be your joining date rather than the date that your stock options were awarded to you (same for cliff).

I left the company that gave me stock options and my window to exercise them is closing…should I exercise or not?

Tricky one. The issue is that you’ll have to pay cash now, without knowing that, when and at what price you’ll be able to sell your shares in the end.

Ultimately, it will depend on the following:

  • By how much are your options in-the-money? If you joined really early and your total exercise price is £30k, with a current valuation of your package of £1.5M, it’s most probably worth it. Even if there’s a risk you’ll lose your £30k, it’s worth it for a potential 50x payoff. On the other hand, if your exercise price is pretty close to the share price of the last funding round, it probably isn’t.
  • How close is the company to an exit? Is this a pretty mature company that is likely to sell to a strategic buyer / PE or even to IPO soon? Or are they far away from even thinking about an exit?
  • What are the odds of the company completely faltering? Has the company developed into an established and profitable business that’s clearly a success story, i.e. it’s just a question of timing? Or is there a very real chance that they’ll simply go under?
  • Would you have to exercise all your options? Potentially you can reduce your risk by only exercising part of your stock options.
  • What’s your tax situation? Would exercising the options trigger tax for you? How much tax would you have to pay when you sell your shares?

If you have a good relationship with the Founder or with employees who are still there, try to get as much insight as possible about the situation of the company, their exit and fundraising plans before making your decision.

Can I negotiate my stock options?

Yes and no.

Yes, you can typically negotiate the size of your stock option package – just like any other element of your offer. Often this happens automatically by negotiating your salary as your stock option award is typically tied to your salary. Check out our free Guide to Negotiating an Offer for a New Job for some additional tips and insights.

On the other hand, it’s typically tricky to negotiate things like vesting periods, cliffs, leaver provisions, etc. simply because they tend to be the same for every single employee. If you’re a really senior, key hire with lots of negotiating leverage, it’s not impossible – but it’ll likely be more difficult than just negotiating the size of your stock option package.

What is impossible to negotiate is your exercise price – the tax authority will set the minimum at which you don’t pay taxes so it’s not up to the company to set it any lower than that.

So, what’s the conclusion? Will I get rich on my stock options?

There’s a good chance that you’ll never make a dime from your options. This could be for one of many reasons…

  • Your company goes bust
  • Your company doesn’t go bust but sells for less than the valuation it had when you joined
  • You leave the company before the end of your cliff
  • You leave the company after the end of your cliff but are considered a bad leaver
  • You leave the company after the end of your cliff and as a good leaver but decide not to exercise your options because you don’t want to pay cash upfront without knowing that you’ll ever be able to sell your shares

There’s also a smaller chance you’ll make some but not a lot of money from your options. Again, this could be for one of many reasons…

  • You come onboard when the company was already relatively mature and growth stalled after you joined
  • You leave during your vesting period and only get a small amount of shares
  • The company gets sold during your vesting period and you only get a small amount of shares
  • You leave before an exit and can only afford to exercise a part of your stock options
  • You overestimated the size of your stock option package
  • You live in a high-tax environment where stock options are concerned

Finally, there is also a chance that you’ll get properly rich off of your options. This will likely be the case if the following apply…

  • You joined an early-stage company that went gangbusters after you joined
  • You stuck around until an exit / substantial liquidity event – if you joined early-stage as the previous bullet implies, this is usually 6+ years with the same company

So, in the end, how excited you should be about your stock options depends not just on its size but also on your risk appetite; your willingness to stick with a company for a long time; and on how optimistic you are that this company will make it big.

What you definitely shouldn’t do is assign value to stock options you don’t understand. Make sure your company walks you through everything you need to know and don’t be afraid to ask “stupid questions”.

Got more questions? Get in touch!

Equity-based compensation is an incredibly intricate topic and while this article has hopefully given you a solid understanding of stock options chances are it doesn’t answer all your questions.

So, don’t hesitate to get in touch if any of the following applies to you…

If you’re a professional

  • You have additional questions that weren’t answered here
  • You want to understand the stock option element of your offer for a new job
  • You want to understand your stock option situation ahead of possibly leaving your company

If you’re in charge of stock options in your company

  • You want to improve your communication around the value, upside and limitations of your stock option packages to your employees
  • You want to design a stock option plan / mechanism to allocate stock options
  • You want to train your HR team and hiring managers on how to communicate around stock options
  • You want to keep employees engaged & motivated with periodic updates on their equity positions
Get in touch