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How can an engineer understand a stock option agreement at a startup?

Chris Barsness, startup, finance, law, and tech nerd

I am sure that you have heard this, but having a lawyer (or at least a CPA or tax attorney) review it for you is sometimes the best thing if the option grant is of significant value (or potential value). If it is something worth over $100,000 to you, it would seem to make sense to spend a little to have someone review it.  That being said, don't expect much of the terms to be changed.  Most option grant agreements are standard forms put together under the overall terms of a company's stock option plan.

Some of the terms can be negotiated as part of your general employment agreement.  The biggest issues to look at that can vary are number of shares, vesting schedules, exercise price versus stock price (which at most startups is not very easy to determine), and provisions for what happens upon you leaving the company sometimes  (e.g. do you have to exercise the option within 30 days of leaving or lose your rights).  You can look at what the company's current capitalization is to see what size piece of the pie you are being offered, but those numbers will change drastically by future investments and other company activity.  If there is an overall stock option plan, reviewing a copy of that as well will give you some insight into what terms are somewhat set in stone.  

I know there are some good posts on here with links to guides to understanding options, but I think the biggest thing to worry about are your personal tax consequences.

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