Issuing stock options requires rigorous process management. Founders must get formal board approval for every grant, maintain a current 409A valuation to set the strike price, use the correct type of option (ISO vs. NSO), and ensure all grant documents are signed. Proactively managing your option pool and standardizing vesting schedules will prevent major headaches during fundraising or an exit.
Key takeaways
- Always get board approval for every stock option grant.
- Maintain a valid 409A valuation, refreshing it annually and after any material event.
- Use ISOs for US employees and NSOs for contractors and international team members.
- Standardize your grant process: board consent, grant agreement, and cap table software.
- Manage your option pool like a budget; don’t grant more shares than you have reserved.
- Use a 4-year vesting schedule with a 1-year cliff as your default for all new hires.
Stock options are a promise. You offer a piece of the future upside in exchange for an employee’s talent and commitment. Get it right, and you create a team of owners. Get it wrong, and you turn that promise into a liability that can cost you key hires, create tax penalties, and kill a funding round during due diligence.
This isn’t about polished paperwork; it’s about the core mechanics of granting equity. Avoid these common mistakes.
You promise a new hire 10,000 options in their offer letter. They sign. The grant is official, right? Wrong. Stock options only exist if they are formally approved by your company’s board of directors.
Without a board resolution, the options were never legally granted. This becomes a crisis during fundraising or M&A diligence. An investor’s lawyers will find every instance where an offer letter promised options that weren’t backed by a board consent. It signals carelessness and forces you into a messy cleanup, which could involve re-pricing grants at a higher value and creating tax problems for your employees.
Use precise language in offer letters. Your offer letter should only state the intent to recommend a grant. Use this language: “Subject to approval by the Company’s Board of Directors, you will be recommended for a grant of an option to purchase [Number] shares of the Company’s common stock.”
Use Unanimous Written Consent (UWC). You don’t need a formal meeting for every grant. Have your lawyer create a UWC template you can circulate to the board for email signatures.
Ensure your board consent is specific. It must include the grantee’s name, their relationship (employee, advisor), the number of shares, the type of option (ISO or NSO), the vesting schedule, and the exercise price (strike price), which must match or exceed your current 409A valuation.
You’re an early-stage company, so you pick a strike price that feels right—say, $0.05 per share. But the IRS requires that options be priced at or above Fair Market Value (FMV), and they…
Frequently asked questions
- How much does a 409A valuation cost?
- For an early-stage startup, a 409A valuation typically costs between $2,000 and $6,000. The price depends on the complexity of your business and the firm you use.
- How big should our employee option pool be?
- A seed-stage option pool is typically 10-15% of the company. When you raise a Series A, investors will expect you to refresh the pool to 10-12% of the post-money capitalization to cover hiring for the next 18-24 months.
- What's the difference between an ISO and an NSO?
- Incentive Stock Options (ISOs) offer potential tax advantages but can only be granted to US employees. Non-Qualified Stock Options (NSOs) can be granted to anyone (employees, contractors, advisors) and are simpler, with income tax due at exercise.
- What happens if we made a mistake on a past grant?
- Contact your lawyers immediately. They can typically help you 'ratify' the grant with a corrective board resolution, cleaning up the paper trail before it becomes a major problem during investor due diligence.
