Employee stock options

The mechanics

A grant of options at a $1.00 strike is worth nothing while the shares trade at $1.00, and $3.00 per option if they reach $4.00: leverage in both directions. Options vest like any equity, and once vested must be exercised (bought at the strike) before they expire, either during employment or within a post-termination window that is often brutally short, 90 days being the startup convention that catches leavers who cannot fund the exercise cost and its tax.

Why startups use them

Early-stage companies can set low strikes, so joiners get maximum leverage on growth, and no cash changes hands until exercise. The trade is risk: most startup options expire worthless, a base rate every candidate should price in. The questions that separate real option value from decoration: strike versus latest valuation, percentage of the company, the post-termination exercise window, and what happens on acquisition.

Tax, at concept level

Regimes differ but the shape recurs: somewhere between exercise and sale, the gain over the strike is taxed, with special schemes in several countries (qualified plans in the US, start-up concessions in Australia, approved schemes in the UK) softening the treatment when conditions are met. The timing traps are real, tax can fall due before the shares can be sold in private companies, so specific advice at grant and before exercise is not optional.