Your first key hires make a real difference to your startup’s trajectory. But your salary budget at the early stages of your business probably won\u2019t match bigger companies.
\nStock options let startups close that gap. Your employees get the right to buy a piece of the company at today’s <\/p>\n","protected":false},"author":169,"featured_media":435329,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[153,147],"tags":[],"event_tags":[],"class_list":["post-435116","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-share-option-schemes-us","category-startup-guides-us"],"acf":{"post_content_width":"default","post_content":[{"acf_fc_layout":"text","text":"
Your first key hires make a real difference to your startup’s trajectory. But your salary budget at the early stages of your business probably won\u2019t match bigger companies.<\/span><\/p>\n Stock options let startups close that gap. Your employees get the right to buy a piece of the company at today’s price, and if you build something valuable together down the line, that right becomes worth real money.<\/span><\/p>\n In this article, we’ll explain:<\/span><\/p>\n Plus we\u2019ll cover the options mistakes that some first-time founders make.<\/span><\/p>\n"},{"acf_fc_layout":"text","text":" A stock option is the right to buy a set number of shares in your company at a fixed price (called a \u201cstrike price\u201d or \u201cexercise price\u201d). The right usually lasts for a set period \u2013 typically 10 years \u2013 and it’s almost always earned gradually through a process called vesting.<\/span><\/p>\n Options are not the same as shares (or stock). A shareholder (or stockholder) is someone who owns part of your company right now. They can vote and appear on your cap table. An option holder owns a right to become a stockholder later. They don\u2019t hold shares, they can\u2019t vote and don\u2019t show up on the cap table until they exercise their option \u2013 which means paying the strike price and buying the shares.<\/span><\/p>\n Every option follows the same lifecycle: <\/span>Grant \u2192 vest \u2192 exercise \u2192 own shares \u2192 sell<\/b><\/p>\n"},{"acf_fc_layout":"image","image":{"ID":435270,"id":435270,"title":"Life Cycle Stock Option","filename":"Life-cycle-stock-option.png","filesize":74476,"url":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Life-cycle-stock-option.png","link":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Life-cycle-stock-option.png","alt":"Life Cycle Stock Option","author":"183","description":"Life Cycle Stock Option","caption":"Life Cycle Stock Option","name":"life-cycle-stock-option","status":"inherit","uploaded_to":435116,"date":"2026-10-02 15:41:34","modified":"2026-10-02 15:41:35","menu_order":0,"mime_type":"image\/png","type":"image","subtype":"png","icon":"https:\/\/seedlegals.com\/wp-includes\/images\/media\/default.png","width":1200,"height":1398,"sizes":{"thumbnail":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Life-cycle-stock-option-150x150.png","thumbnail-width":150,"thumbnail-height":150,"medium":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Life-cycle-stock-option-258x300.png","medium-width":258,"medium-height":300,"medium_large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Life-cycle-stock-option.png","medium_large-width":768,"medium_large-height":895,"large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Life-cycle-stock-option-879x1024.png","large-width":879,"large-height":1024,"_themosis_media":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Life-cycle-stock-option-100x100.png","_themosis_media-width":100,"_themosis_media-height":100,"1536x1536":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Life-cycle-stock-option.png","1536x1536-width":1200,"1536x1536-height":1398,"2048x2048":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Life-cycle-stock-option.png","2048x2048-width":1200,"2048x2048-height":1398,"themosis":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Life-cycle-stock-option-200x150.png","themosis-width":200,"themosis-height":150,"tog-small":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Life-cycle-stock-option-300x350.png","tog-small-width":300,"tog-small-height":350,"tog-medium":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Life-cycle-stock-option-600x699.png","tog-medium-width":600,"tog-medium-height":699,"tog-large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Life-cycle-stock-option-1000x1165.png","tog-large-width":1000,"tog-large-height":1165,"tog-huge":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Life-cycle-stock-option.png","tog-huge-width":1200,"tog-huge-height":1398}},"caption":"","width":"100","alignment":"left"},{"acf_fc_layout":"text","text":" There are two moments in the lifecycle of an option where tax can arise \u2013\u00a0first, on exercise and second on a sale. We\u2019ll go over these in more detail below.<\/span><\/p>\n You should also be aware of the key legal document behind options \u2013\u00a0called an equity incentive plan.<\/span><\/p>\n It\u2019s also called a stock option plan, or employee stock option plan (\u201cESOP\u201d). The option pool is the block of shares you reserve under that plan for future option grants.<\/span><\/p>\n"},{"acf_fc_layout":"content_highlight","highlight_type":"tip","background_colour":"blue","show_icon":false,"content":"\ud83d\udcd6 Read more:<\/strong> If you want to see how option holders (and the option pool) show up in your ownership numbers, read our cap table guide \u2013 what it is and why you need one<\/a>","link":null},{"acf_fc_layout":"text","text":" There are three main reasons why stock options are commonly used by early-stage businesses.<\/span><\/p>\n \ud83e\uddf2 To attract and keep talent you can’t yet afford.<\/b> Options let you compete with bigger salaries by offering equity upside instead of cash. Industry data shows startups leaning on equity more and more, with grants to early hires rising fastest in AI and machine learning roles.<\/span><\/p>\n \ud83c\udfaf To align your team with the company.<\/b> An option is worthless unless the company\u2019s share price rises above the strike price. So an option holder\u2019s incentive becomes the same as the business\u2019s \u2013\u00a0to make the company as valuable as possible.<\/span><\/p>\n \ud83e\udd1d Because investors expect it.<\/b> Most term sheets create or top up an option pool as part of the round. Offering equity is a standard part of building a startup in the US.<\/span><\/p>\n"},{"acf_fc_layout":"text","text":" The easiest way to see the mechanics is to follow one grant from start to finish.<\/span><\/p>\n Let\u2019s meet Maya \u2013 the first engineer at your startup.<\/span><\/p>\n You and your co-founder hold 9,000,000 shares between you, and you\u2019ve reserved a 1,000,000-share option pool (we\u2019ll cover option pools in more depth below).<\/span><\/p>\n"},{"acf_fc_layout":"image","image":{"ID":435276,"id":435276,"title":"Mayas Grant","filename":"Mayas-grant.png","filesize":62964,"url":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Mayas-grant.png","link":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Mayas-grant.png","alt":"Mayas Grant","author":"183","description":"Mayas Grant","caption":"Mayas Grant","name":"mayas-grant","status":"inherit","uploaded_to":435116,"date":"2026-10-02 15:42:45","modified":"2026-10-02 15:42:45","menu_order":0,"mime_type":"image\/png","type":"image","subtype":"png","icon":"https:\/\/seedlegals.com\/wp-includes\/images\/media\/default.png","width":1200,"height":1200,"sizes":{"thumbnail":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Mayas-grant-150x150.png","thumbnail-width":150,"thumbnail-height":150,"medium":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Mayas-grant-300x300.png","medium-width":300,"medium-height":300,"medium_large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Mayas-grant.png","medium_large-width":768,"medium_large-height":768,"large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Mayas-grant-1024x1024.png","large-width":1024,"large-height":1024,"_themosis_media":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Mayas-grant-100x100.png","_themosis_media-width":100,"_themosis_media-height":100,"1536x1536":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Mayas-grant.png","1536x1536-width":1200,"1536x1536-height":1200,"2048x2048":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Mayas-grant.png","2048x2048-width":1200,"2048x2048-height":1200,"themosis":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Mayas-grant-200x150.png","themosis-width":200,"themosis-height":150,"tog-small":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Mayas-grant-300x300.png","tog-small-width":300,"tog-small-height":300,"tog-medium":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Mayas-grant-600x600.png","tog-medium-width":600,"tog-medium-height":600,"tog-large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Mayas-grant-1000x1000.png","tog-large-width":1000,"tog-large-height":1000,"tog-huge":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Mayas-grant.png","tog-huge-width":1200,"tog-huge-height":1200}},"caption":"","width":"100","alignment":"left"},{"acf_fc_layout":"text","text":" You\u2019ve agreed to give Maya options over 150,000 shares \u2013 1.5% of the company.<\/span><\/p>\n Options are granted under your equity incentive plan and approved by your board. The grant sets the number of shares, the option type, the strike price, the vesting schedule and the expiration date. A promise in an offer letter is <\/span>not <\/span><\/i>a grant. Until your board approves it, the recipient doesn\u2019t really have anything.\u00a0<\/span><\/p>\n For Maya, that means her equity becomes real at the board meeting where her grant is approved. The board approved her option over 150,000 shares (sometimes referred to as \u201c150,000 options\u201d) at a strike price of $1.00 (we\u2019ll cover how that price is set later), vesting over four years, and expiring after 10.<\/span><\/p>\n Vesting is how option holders earn their options. In Maya\u2019s case, it\u2019s her gradually earning the right to buy shares at the old $1.00 price, no matter what they’re worth later.<\/span><\/p>\n Typically options vest over a time period \u2013 the longer someone stays, the more of their grant they get to keep. Vesting can also be linked to other milestones (like shipping a product, hitting a revenue target). But for startup employees, time-based vesting is almost always what\u2019s used.<\/span><\/p>\n The standard vesting schedule is \u201cfour years with a one-year cliff\u201d. That means nothing vests for the first 12 months, then 25% of the options vest at once. After that, the rest vest monthly.<\/span><\/p>\n"},{"acf_fc_layout":"image","image":{"ID":435282,"id":435282,"title":"One Year Cliff","filename":"One-year-cliff.png","filesize":45816,"url":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/One-year-cliff.png","link":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/One-year-cliff.png","alt":"One Year Cliff","author":"183","description":"One Year Cliff","caption":"One Year Cliff","name":"one-year-cliff","status":"inherit","uploaded_to":435116,"date":"2026-10-02 15:43:21","modified":"2026-10-02 15:43:21","menu_order":0,"mime_type":"image\/png","type":"image","subtype":"png","icon":"https:\/\/seedlegals.com\/wp-includes\/images\/media\/default.png","width":1200,"height":1200,"sizes":{"thumbnail":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/One-year-cliff-150x150.png","thumbnail-width":150,"thumbnail-height":150,"medium":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/One-year-cliff-300x300.png","medium-width":300,"medium-height":300,"medium_large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/One-year-cliff.png","medium_large-width":768,"medium_large-height":768,"large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/One-year-cliff-1024x1024.png","large-width":1024,"large-height":1024,"_themosis_media":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/One-year-cliff-100x100.png","_themosis_media-width":100,"_themosis_media-height":100,"1536x1536":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/One-year-cliff.png","1536x1536-width":1200,"1536x1536-height":1200,"2048x2048":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/One-year-cliff.png","2048x2048-width":1200,"2048x2048-height":1200,"themosis":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/One-year-cliff-200x150.png","themosis-width":200,"themosis-height":150,"tog-small":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/One-year-cliff-300x300.png","tog-small-width":300,"tog-small-height":300,"tog-medium":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/One-year-cliff-600x600.png","tog-medium-width":600,"tog-medium-height":600,"tog-large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/One-year-cliff-1000x1000.png","tog-large-width":1000,"tog-large-height":1000,"tog-huge":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/One-year-cliff.png","tog-huge-width":1200,"tog-huge-height":1200}},"caption":"","width":"100","alignment":"left"},{"acf_fc_layout":"text","text":" So, on Maya\u2019s schedule, nothing vests within her first year. Then, after exactly 12 months, 37,500 options (25%) vest. After that, 3,125 more vest each month until she\u2019s fully vested at year four.<\/span><\/p>\n Once options have vested, the holder can \u201cexercise\u201d them \u2013 that means actually buying the shares.<\/span><\/p>\n The holder pays the strike price multiplied by the number of options to buy the stock and become a stockholder.<\/span><\/p>\n The company then issues the shares, and updates the cap table.<\/span><\/p>\n Maya doesn\u2019t have to exercise the moment her options vest \u2013 most employees wait \u2013 but when she does, she pays $1.00 per vested share and becomes a stockholder.<\/span><\/p>\n"},{"acf_fc_layout":"content_highlight","highlight_type":"tip","background_colour":"blue","show_icon":false,"content":"\ud83e\udde0 Some plans let employees \u201cearly exercise\u201d (meaning buy their shares before they\u2019ve vested). Generally, when an option holder leaves the company their unvested options go back into the option pool, and their vested options must be exercised within a specific window after termination \u2013 90 days is standard.<\/span><\/p>\n If Maya left after 18 months, she\u2019d have 56,250 vested options (out of 150,000) and 90 days to exercise them \u2013 the other 93,750 would go back into the company pool.\u00a0<\/span><\/p>\n These are just the standard rules. In reality, all of this depends on what your plan documents say. They can be stricter \u2013 termination for cause, for example, can mean that person forfeits everything, vested or not, if the plan provides for it.<\/span><\/p>\n"},{"acf_fc_layout":"text","text":" In the US, the law gives you two choices of options:<\/span><\/p>\n Generally, it\u2019s a simple decision. ISOs are more tax efficient. So, if it\u2019s a US employee, then grant ISOs.<\/span><\/p>\n If it\u2019s a contractor, advisor, board member, or anyone not on payroll, then grant NSOs. ISOs aren’t allowed for them.<\/span><\/p>\n Here\u2019s a simple table summarizing the differences between the two option types \ud83d\udc47<\/span><\/p>\n"},{"acf_fc_layout":"image","image":{"ID":435341,"id":435341,"title":"Table 1","filename":"Table-1.png","filesize":99343,"url":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-1.png","link":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-1.png","alt":"Table 1","author":"82","description":"Table 1","caption":"Table 1","name":"table-1","status":"inherit","uploaded_to":435116,"date":"2026-10-07 15:40:45","modified":"2026-10-07 15:40:45","menu_order":0,"mime_type":"image\/png","type":"image","subtype":"png","icon":"https:\/\/seedlegals.com\/wp-includes\/images\/media\/default.png","width":1295,"height":855,"sizes":{"thumbnail":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-1-150x150.png","thumbnail-width":150,"thumbnail-height":150,"medium":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-1-300x198.png","medium-width":300,"medium-height":198,"medium_large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-1.png","medium_large-width":768,"medium_large-height":507,"large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-1-1024x676.png","large-width":1024,"large-height":676,"_themosis_media":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-1-100x100.png","_themosis_media-width":100,"_themosis_media-height":100,"1536x1536":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-1.png","1536x1536-width":1295,"1536x1536-height":855,"2048x2048":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-1.png","2048x2048-width":1295,"2048x2048-height":855,"themosis":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-1-200x150.png","themosis-width":200,"themosis-height":150,"tog-small":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-1-300x198.png","tog-small-width":300,"tog-small-height":198,"tog-medium":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-1-600x396.png","tog-medium-width":600,"tog-medium-height":396,"tog-large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-1-1000x660.png","tog-large-width":1000,"tog-large-height":660,"tog-huge":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-1.png","tog-huge-width":1295,"tog-huge-height":855}},"caption":"","width":"100","alignment":"left"},{"acf_fc_layout":"content_highlight","highlight_type":"tip","background_colour":"blue","show_icon":false,"content":"\ud83d\udd0d For a full breakdown of the differences, here\u2019s our dedicated guide on whether you should grant ISOs and NSOs.<\/a>","link":null},{"acf_fc_layout":"text","text":" The strike price is the fixed price an option holder pays per share when they exercise. The price is set on the day of the grant, no matter what the shares are worth by the time they buy.\u00a0<\/span><\/p>\n That’s essentially the deal at the heart of every option \u2013 Maya pays $1.00 a share even if they’re worth $10 by then.<\/span><\/p>\n But you can\u2019t set the strike price at any number \u2013 it must be at least the fair market value (FMV) of your common stock on the day of the grant. For a private company, that FMV comes from a 409A valuation \u2013 an independent appraisal. That\u2019s where Maya\u2019s $1.00 strike price needed to have come from.<\/span><\/p>\n"},{"acf_fc_layout":"content_highlight","highlight_type":"tip","background_colour":"blue","show_icon":false,"content":"\ud83d\udcd6 Read more <\/strong>: What is a 409A valuation, and when do I need one for my startup?<\/a> \u2013 timing, safe harbors and what it costs","link":null},{"acf_fc_layout":"text","text":" Your 409A price is not your fundraising valuation. Investors buy preferred stock with special rights \u2013\u00a0but your team will typically get options over common stock, which is worth less (often a lot less early on). That gap is what makes options valuable to them.<\/span><\/p>\n A 409A stays valid for 12 months, or until something material changes (like a new priced round or an acquisition offer). So, get one before your first grant, then refresh it every 12 months or after every round.\u00a0<\/span><\/p>\n If you skip this, it could have tax consequences for your employees. Options priced below FMV are taxed as they vest, plus a 20% additional federal tax, plus interest. Some states add their own penalty on top \u2013 for example, California\u2019s is another 5%.<\/span><\/p>\n"},{"acf_fc_layout":"text","text":" Most startups reserve 10-15% of their equity for employee options, with 10% being the most common starting point.<\/span><\/p>\n The best approach is to map out the people you expect to hire over the next 12\u201318 months, estimate how much equity each hire will need and size the pool according to that.<\/span><\/p>\n This matters when you raise funding. Investors will often ask you to create or enlarge the pool before they invest. Because the new shares are set aside before their money comes in, the resulting dilution falls on the existing shareholders rather than the new investor.<\/span><\/p>\n Investors therefore benefit from having a larger option pool in place before they invest. Suppose your hiring plan shows that five new hires will need options equal to 8% of the company, but an investor asks you to create a 15% pool before the funding round completes. The additional 7% would dilute the existing shareholders, but not the new investor. A detailed hiring plan gives you a concrete reason to argue that 8% is enough.<\/span><\/p>\n Industry data on seed-stage startups puts the median grant for a first hire at about 1.5% of the company (that\u2019s the same as Maya\u2019s 150,000 options). This falls to around 0.85% for hire two, 0.5% for hire three and 0.33% by hire five.\u00a0<\/span><\/p>\n Advisors typically get around 0.24% at pre-seed, sliding to 0.05% by Series A.<\/span><\/p>\n Dilution is when your slice of the company shrinks because new shares (or rights to shares) are created \u2013 you own the same number of shares, but they make up a smaller percentage of a bigger pie.<\/span><\/p>\n Creating the pool is when you get your dilution. For example, an option pool of 1,000,000 shares next to your 9,000,000 took you and your co-founder\u2019s ownership from 100% to 90% of the company on a fully diluted basis.\u00a0<\/span><\/p>\n Actually <\/span>granting<\/span><\/i> from the pool doesn\u2019t dilute anyone further \u2013 Maya\u2019s options were already counted the day you created it.<\/span><\/p>\n"},{"acf_fc_layout":"content_highlight","highlight_type":"tip","background_colour":"blue","show_icon":false,"content":"\ud83d\udcd6 Read more <\/strong>: Startup equity: how much to give employees<\/a> \u2013 role-by-role grant ranges \u2013 and our equity dilution calendar<\/a> to model your own numbers. ","link":null},{"acf_fc_layout":"text","text":" Here are the eight steps you need to take.<\/span><\/p>\n Step 1 \u2013 Check your share structure:<\/b> Look at your certificate of incorporation and count what\u2019s already issued. You need enough authorized but unissued common stock to cover the whole pool \u2013 if you don\u2019t have it, amend the certificate before going further.<\/span><\/p>\n Step 2<\/b> \u2013 <\/span>The board adopts the equity incentive plan:<\/b> Your board signs off on the plan document itself. The plan must state the maximum number of shares that can ever be issued under it \u2013 that maximum is your option pool.<\/span><\/p>\n Step 3 \u2013\u00a0Stockholders approve the plan:<\/b> Your stockholders (at the start, usually just the founders) approve the plan too. This must happen within 12 months of board adoption \u2013 without it, you can\u2019t grant ISOs at all.<\/span><\/p>\n Step 4 \u2013 Get your 409A valuation: <\/b>Commission the independent appraisal before anyone receives anything. It sets the fair market value of your common stock, which becomes the strike price for every grant you make while the valuation is current.<\/span><\/p>\n Step 5 \u2013 The board approves each grant: <\/b>Every individual grant needs its own board approval, covering who receives it, how many shares, at what price, on what vesting schedule, and any special terms. If a term isn\u2019t in the board approval, it doesn\u2019t exist.<\/span><\/p>\n Step 6 \u2013 Sign the paperwork: <\/b>The company and the option holder both sign a notice of grant and an option agreement. Then log the grant on your cap table, so your fully diluted numbers stay accurate.<\/span><\/p>\n Step 7 \u2013 Check securities law: <\/b>Option grants are technically \u201coffers of securities\u201d \u2013 but almost every startup grant fits inside a ready-made exemption called Rule 701, so there\u2019s no SEC registration to go with it. There are caps on how much you can grant in a year, and some states (like California) want a short notice filing \u2013 <\/span>our Rule 701 guide<\/span><\/a> walks through both.<\/span><\/p>\n Step 8 \u2013 Run the plan: <\/b>Granting the option is the start of the process. You\u2019ll need to track vesting and exercises, set aside room for \u201crefresh\u201d grants (top-up options for existing team members), refresh the 409A every 12 months or whenever something material changes, and file <\/span>Form 3921<\/span><\/a> with the IRS each January (a short form that reports the previous year\u2019s ISO exercises).<\/span><\/p>\n One thing to note on timing is that, once you\u2019ve raised a priced round, you\u2019ll usually need investor consent to make the pool bigger. It\u2019s easier to set the pool up before you raise, so you can get the consent more easily.<\/span><\/p>\n Here\u2019s how it typically plays out by stage:<\/span><\/p>\n"},{"acf_fc_layout":"image","image":{"ID":435347,"id":435347,"title":"Table 2","filename":"Table-2.png","filesize":71262,"url":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-2.png","link":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-2.png","alt":"Table 2","author":"82","description":"Table 2","caption":"Table 2","name":"table-2","status":"inherit","uploaded_to":435116,"date":"2026-10-07 15:41:59","modified":"2026-10-07 15:42:00","menu_order":0,"mime_type":"image\/png","type":"image","subtype":"png","icon":"https:\/\/seedlegals.com\/wp-includes\/images\/media\/default.png","width":1295,"height":525,"sizes":{"thumbnail":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-2-150x150.png","thumbnail-width":150,"thumbnail-height":150,"medium":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-2-300x122.png","medium-width":300,"medium-height":122,"medium_large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-2.png","medium_large-width":768,"medium_large-height":311,"large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-2-1024x415.png","large-width":1024,"large-height":415,"_themosis_media":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-2-100x100.png","_themosis_media-width":100,"_themosis_media-height":100,"1536x1536":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-2.png","1536x1536-width":1295,"1536x1536-height":525,"2048x2048":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-2.png","2048x2048-width":1295,"2048x2048-height":525,"themosis":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-2-200x150.png","themosis-width":200,"themosis-height":150,"tog-small":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-2-300x122.png","tog-small-width":300,"tog-small-height":122,"tog-medium":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-2-600x243.png","tog-medium-width":600,"tog-medium-height":243,"tog-large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-2-1000x405.png","tog-large-width":1000,"tog-large-height":405,"tog-huge":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-2.png","tog-huge-width":1295,"tog-huge-height":525}},"caption":"","width":"100","alignment":"left"},{"acf_fc_layout":"text","text":" Done the traditional way, you\u2019ll need a lawyer to set up your stock option plan for you \u2013 drafting the plan, consents and grant paperwork typically costs a few thousand dollars in legal fees \u2013 and that\u2019s before your first grant. Then you need to pay for your 409A valuation (from around $1,000), plus more lawyer time every time you grant.\u00a0<\/span><\/p>\n It\u2019s why so many founders keep putting options off \u2013 and why employees often get promised-but-never-granted equity.<\/span><\/p>\n"},{"acf_fc_layout":"cta","cta":{"type":"default","subheading":"","heading":"Raise faster with SeedLegals SAFEs","content":"Create a SAFE that fits your startup's needs, with support from our team to help you nail down what you want.","bullet_points":false,"form":{"type":"none","hubspot_form":{"layout":"newsletter","hide_founderinvestor_toggle":false,"default_community":"founder","custom_form_id":"","gdpr_disclaimer":"By subscribing, you agree to receive information from SeedLegals. You can unsubscribe anytime. View our privacy policy<\/a>"},"custom":{"embed":""},"gtm_form_type":"default","gtm_form_location":"default"},"button":{"title":"Tell me more","url":"https:\/\/seedlegals.com\/us\/raise\/safe\/","target":"_blank"},"image":412114}},{"acf_fc_layout":"text","text":" This table gives you a summary of how options are taxed \ud83d\udc47<\/span><\/p>\n"},{"acf_fc_layout":"image","image":{"ID":435335,"id":435335,"title":"Table 3","filename":"Table-3.png","filesize":69813,"url":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-3.png","link":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-3.png","alt":"Table 3","author":"82","description":"Table 3","caption":"Table 3","name":"table-3","status":"inherit","uploaded_to":435116,"date":"2026-10-07 15:38:22","modified":"2026-10-07 15:38:22","menu_order":0,"mime_type":"image\/png","type":"image","subtype":"png","icon":"https:\/\/seedlegals.com\/wp-includes\/images\/media\/default.png","width":1295,"height":654,"sizes":{"thumbnail":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-3-150x150.png","thumbnail-width":150,"thumbnail-height":150,"medium":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-3-300x152.png","medium-width":300,"medium-height":152,"medium_large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-3.png","medium_large-width":768,"medium_large-height":388,"large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-3-1024x517.png","large-width":1024,"large-height":517,"_themosis_media":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-3-100x100.png","_themosis_media-width":100,"_themosis_media-height":100,"1536x1536":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-3.png","1536x1536-width":1295,"1536x1536-height":654,"2048x2048":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-3.png","2048x2048-width":1295,"2048x2048-height":654,"themosis":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-3-200x150.png","themosis-width":200,"themosis-height":150,"tog-small":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-3-300x152.png","tog-small-width":300,"tog-small-height":152,"tog-medium":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-3-600x303.png","tog-medium-width":600,"tog-medium-height":303,"tog-large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-3-1000x505.png","tog-large-width":1000,"tog-large-height":505,"tog-huge":"https:\/\/seedlegals.com\/wp-content\/uploads\/2026\/10\/Table-3.png","tog-huge-width":1295,"tog-huge-height":654}},"caption":"","width":"100","alignment":"left"},{"acf_fc_layout":"text","text":" Let\u2019s follow 10,000 of Maya\u2019s vested options at her $1.00 strike price.\u00a0<\/span><\/p>\n Years later the shares are worth $10 each. She exercises, which costs her $10,000, for shares that are worth $100,000 \u2013 so, it\u2019s a $90,000 gain on paper.<\/span><\/p>\n This is general information, not tax advice \u2013 rates and thresholds change, so point your team to a tax advisor for their own situation.<\/span><\/p>\n"},{"acf_fc_layout":"text","text":" Stock options shouldn\u2019t be complicated.<\/span><\/p>\n SeedLegals gives you the documents, workflows and expert support to set up your stock option plan, make your first grants the right way, and keep your cap table accurate as you grow.\u00a0<\/span><\/p>\n Book a call below<\/span> or start your 7-day free trial<\/a> today.<\/span><\/p>\n"},{"acf_fc_layout":"form","layout":"custom","heading":"Get answers fast, for free","content":"Bring all your questions - we\u2019ve got the answers!\r\nWe\u2019ll match you with the right specialist.","custom":{"image":false,"button_text":"Get Started","form":{"type":"hubspot","hubspot_form":{"layout":"default","hide_founderinvestor_toggle":false,"default_community":"founder","custom_form_id":"21723609-6f1b-45c0-9691-77d462dc3bed","gdpr_disclaimer":"By subscribing, you agree to receive information from SeedLegals. You can unsubscribe anytime. View our privacy policy<\/a>"},"custom":{"embed":""},"gtm_form_type":"default","gtm_form_location":"default"}},"add_shadow":false},{"acf_fc_layout":"text","text":" Industry data puts the median first-hire grant at 1.5%, with most between 0.5% and 4%. Seniority, salary trade-off and timing move the number \u2013 <\/span>\n
What are stock options?<\/b><\/h2>\n
Why do startups use stock options?<\/b><\/h2>\n
How do stock options work?<\/b><\/h2>\n
Stage 1 \u2013 The grant<\/b><\/h3>\n
Stage 2 \u2013 Vesting<\/b><\/h3>\n
Stage 3 \u2013 Exercising<\/b><\/h3>\n
\r\n
\r\nThis can be a big tax win for the earliest hires, but it only works with an 83(b) election that\u2019s filed within 30 days.
\r\nHere\u2019s our guide on what an 83(b) election is and when you need one.<\/a>","link":null},{"acf_fc_layout":"text","text":"Stage 4 \u2013\u00a0When someone leaves<\/b><\/h3>\n
Should I grant ISOs or NSOs?<\/b><\/h2>\n
\n
What is a strike price, and why do I need a 409A valuation?<\/b><\/h2>\n
How much equity should I set aside?<\/b><\/h2>\n
The option pool<\/b><\/h3>\n
For each hire<\/b><\/h3>\n
Dilution<\/b><\/h3>\n
How do I set up a stock option plan?<\/b><\/h2>\n
How much does it cost to set up a stock option plan?<\/b><\/h2>\n
How are stock options taxed?<\/b><\/h2>\n
\n
\n<\/span>One more benefit is that shares bought by exercising options can qualify for <\/span>Qualified Small Business Stock (QSBS)<\/span><\/a> treatment \u2013 which can wipe out some or all of the federal capital gains tax after a few years. The clock starts at exercise, not when the options were granted.<\/span><\/p>\nWhat mistakes do first-time founders make?<\/b><\/h2>\n
\n
\n<\/span><\/li>\n<\/ol>\n"},{"acf_fc_layout":"text","text":"Set up your stock options on SeedLegals<\/b><\/h2>\n
FAQs<\/b><\/h1>\n"},{"acf_fc_layout":"additional_post_content","sections":[{"heading":"How much equity should I give my first employee?","post_content":false,"text":"