How Do Startup Stock Options Work

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The Startup Stock Option is the type of option that is a restricted and American-style long call option on the common stock of the startup business. This one sounds complicated and that notion is definitely a fact. Hold on tight and let's investigate every part while it becomes necessary.

The startup stock option isn’t stock yet it is the best and the most appropriate way of purchasing stock sometime in years to come. This particular concept is relatively important and you will find that purchasing stock with the option could be difficult.

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From your homework, you recall that each stock option comes with 4 basic attributes and these include the underlying stock, the strike price, premium and the expiration date.  Once you go through the given list, you will easily understand how startup stock option works.

  • Underlying stock – the common stock of the startup and the specified amount of shares available
  • Strike cost – the fair market value of the common stock of the startup at the time the startup stock has been granted
  • Premium – it will be zero by the period of time that the startup shares have been granted
  • Expiration date  - rolling expiration date, typically three months from leaving the business

Why Do Startup Companies Compensate with Equity?

It is beneficial for the context to understand the startup equity coming from the initial principles. There is no other industry wherein the equity compensation is nearly as prevalent as the technical startups. Why is this?

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  • Startups do have some amount of cash – the startups should give an alternative and that is for the reason that they cannot compete with all-in cash compensation of huge tech corporations that are usually fifty percent to two hundred percent which is higher compared to those at the startup. Big tech companies do come with millions of cash per employee. The startups do come with millions of cash in total.
  • People want to gamble. The equity in the startup feels like the lotto ticket and this can be worth millions of cash or it can be nothing. It is enjoyable to dream about being rich so that the employees will be taking the lotto ticket.
  • Free money – though no one will ever want to accept the fact, there are a lot of startups that underestimate their common stocks. It will produce free money which the startups can make use in order to compensate the employees through giving some options with artificially low strike costs.
  • Behaving like the owner – whether it is true or not, there’s a widespread belief that providing the employees of all levels with equity will align incentives together with some other shareholders, such as the investors and founders. If everyone is the owner of the startup and everybody behaves like the owner, the theory will go.

These factors contribute on the way the Startup Stock Option works. Perhaps, this kind of option is suitable for your needs. Please do not hesitate to learn more about this type of option and try to find out how you can benefit from startup stock option.

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