How long do employees have to exercise after leaving?

Traditional: 90 days post-termination or the ISO tax status is lost. Modern practice at competitive startups: extended exercise window (5-10 years post-termination), which converts remaining ISOs to NSOs but preserves the employee's ability to exercise.

What's a fair strike price?

The current 409A valuation of common stock. Anything below is illegal (Section 409A penalties). Anything above is unusual and reduces employee incentive value.

Should we refresh option grants?

Yes — after 2-3 years, employees' initial grants approach full vesting. Refresh grants (typically 25-50% of original grant size) at annual reviews or promotions to retain key talent.

Employee Stock Options: Grant Sizes, Vesting, Tax Treatment

How to grant employee stock options: benchmark grant sizes, vesting structures, ISO vs. NSO, early exercise, and the mistakes that cost employees millions.

Employee Stock Options: A Founder's Guide to Getting It Right

Stock options are how startups compete for talent against public-company salaries. Done well, they align employees with company success and create life-changing wealth at exit. Done poorly, they create tax nightmares and legal liabilities. Get the mechanics right from the first grant.

Grant size benchmarks

First 10 employees: 0.5-2% each (roles from senior engineer to VP). Employees 11-50: 0.05-0.5% depending on level and stage. Post-Series A hires: 0.02-0.25%. VPs at Series A: 0.5-1.5%. CTO/CFO hires at Series A: 1-3%. Grants shrink with each round as the company grows.

Vesting structure

Standard: 4-year vest, 1-year cliff, monthly thereafter. Cliff = zero vested before month 12, then 25% at month 12. Some companies use 5-year vesting for very early hires or 3-year for later-stage. Acceleration (single or double trigger on acquisition) is negotiated case-by-case for senior hires.

ISO vs. NSO

ISOs (Incentive Stock Options): tax-advantaged, only for employees, subject to $100K annual vesting cap and AMT implications. NSOs (Non-Qualified Stock Options): ordinary income tax on exercise, no annual cap, can be granted to contractors and advisors. Most employees get ISOs; contractors get NSOs.

Early exercise and 83(b)

Early exercise lets employees buy options before vesting. Combined with 83(b) election filed within 30 days: starts long-term capital gains clock immediately, potentially saving significant tax at exit. Only makes sense when 409A is still low and employee has cash to exercise. Requires company board approval.

Frequently asked questions

How long do employees have to exercise after leaving?: Traditional: 90 days post-termination or the ISO tax status is lost. Modern practice at competitive startups: extended exercise window (5-10 years post-termination), which converts remaining ISOs to NSOs but preserves the employee's ability to exercise.
What's a fair strike price?: The current 409A valuation of common stock. Anything below is illegal (Section 409A penalties). Anything above is unusual and reduces employee incentive value.
Should we refresh option grants?: Yes — after 2-3 years, employees' initial grants approach full vesting. Refresh grants (typically 25-50% of original grant size) at annual reviews or promotions to retain key talent.

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