Stock Option Plan Information Statement: A Founder's Guide

The Information Statement for a Stock Option Plan: A Founder's Guide

Every startup that grants employee stock options must give recipients a written Information Statement (sometimes called a Plan Summary or Plan Prospectus) that explains, in plain language, how the plan works. It sits alongside the full Equity Incentive Plan document, the individual Option Agreement, and the Notice of Stock Option Grant.

Most founders treat it as boilerplate. That is a mistake. The Information Statement is the document your employees actually read, quote back at you, and forward to their tax advisors. When it is unclear, you get repeated 1:1 questions, resentment about vesting mechanics, and — occasionally — real tax exposure for the employee that becomes an HR problem for you.

This guide walks through every section of a standard Information Statement, in the order it appears, with what to say clearly and the mistakes to avoid.

This is founder education, not legal or tax advice. Every stock plan document must be reviewed by qualified employment and tax counsel.

It is a summary of the Equity Incentive Plan. The full Plan document controls.

It is not an offer document under securities laws — the securities exemption (typically Rule 701 in the U.S.) governs that.

It is not individualized tax advice. It describes the general federal tax treatment; employees must consult their own advisors.

That distinction matters. Overstating precision or under-stating uncertainty in this document is what creates liability.

Open by naming (a) the company, (b) the class of stock being offered (almost always common stock at par value $0.0001 or $0.00001), and (c) who is eligible: employees, non-employee directors, officers, and consultants.

State the purpose in one honest sentence: the plan exists to give service providers an ownership stake and to align them with long-term company success. Avoid marketing language. Employees can tell the difference.

Then describe what the plan can grant. A modern startup plan typically authorizes three award types:

Restricted stock awards (RSAs) — outright grants of shares subject to vesting.

Restricted stock units (RSUs) — a promise to deliver shares upon vesting.

The Plan is administered by the Board of Directors — or a Compensation Committee delegated by the Board. State this clearly, and be explicit about what the Administrator can do: determine who gets Awards, how many shares, when they vest, when they expire, and how the Plan is interpreted.

Employees often assume they can negotiate vesting or exercise terms after signing. They cannot. The Administrator has full discretion, and disputes go nowhere. Saying this in the Information Statement prevents difficult conversations later.

State the maximum number of shares issuable under the Plan over its life — the "option pool." Explain the mechanics:

The pool automatically adjusts for stock splits, stock dividends, and other recapitalizations, so the economic value of outstanding Awards is preserved.

The Board may amend the pool size, but material increases typically require stockholder approval.

State who can receive Awards (employees, directors, officers, consultants) and, critically, that eligibility does not entitle any person to a grant. All grants are discretionary. This one sentence resolves 90% of "why did they get more than me" conversations before they start.

Explain that every grant is evidenced by a signed Option Agreement (or RSA/RSU Agreement) and, in some jurisdictions, a Notice of Grant. Nothing is granted verbally. Nothing is granted by email. If it is not in a signed agreement, it does not exist.

The single most misunderstood part of any startup option grant is the difference between Incentive Stock Options (ISOs) and Nonstatutory Stock Options (NSOs).

ISOs are options that meet the requirements of Section 422 of the Internal Revenue Code. They receive preferential tax treatment if specific holding-period rules are met.

NSOs are any options that do not qualify as ISOs. They are the default. An option is not an ISO unless the Option Agreement expressly designates it as one.

ISOs may only be granted to employees, not consultants or directors.

ISOs are subject to a $100,000 per-year vesting limit — the aggregate fair market value (measured at grant) of stock that first becomes exercisable in any calendar year cannot exceed $100,000. Any excess is automatically treated as an NSO. 10% stockholders are subject to special rules: ISO exercise price must be at least 110% of FMV, and the maximum term is 5 years.

Do not oversell ISOs. Their preferential treatment depends on the employee meeting a holding period (two years from grant, one year from exercise), and on not triggering Alternative Minimum Tax (AMT) at exercise — a real and common problem.

Every option granted under the plan must have an exercise price of at least 100% of the fair market value (FMV) of the common stock on the date of grant. For 10% stockholders receiving ISOs, the floor is 110%.

FMV is determined by the Board — but at any funded startup, it must be supported by a qualified Section 409A valuation performed at least every 12 months (or after any material event, such as a priced round). Setting the strike price below 409A FMV creates severe tax consequences for the employee, including immediate taxation of the option and a 20% federal penalty.

Do not promise a strike price at the time of the offer letter — always defer to the 409A valuation in effect at the date of Board grant.

State the vesting mechanics in plain English. The market-standard startup schedule is:

Four-year vesting with a one-year cliff (no shares vest until the first anniversary of the vesting start date, at which point 25% vests), followed by monthly vesting of 1/48 of the total grant.

Vesting stops on the last day of employment. Any unvested options are forfeited.

Vested options remain exercisable for a limited period after termination (see next section).

Be explicit that the Administrator may specify different schedules in the Option Agreement — and that the Option Agreement controls.

This is the section employees care about most and understand least. State it clearly:

After voluntary or involuntary termination without cause: typically 90 days to exercise vested options. After 90 days, unexercised options expire.

After termination for cause: options typically expire immediately.

After termination due to death or disability: typically 12 months.

ISO status is only preserved if exercised within 90 days of termination. After 90 days, any remaining options — even if the Option Agreement extends the exercise window — automatically convert to NSOs.

Many modern startups have extended post-termination exercise windows (5, 7, or 10 years). If your plan does that, say so — and warn employees that ISOs automatically convert to NSOs after the 90-day statutory window regardless of what the Option Agreement allows.

1. Options are not transferable. Except by will or laws of descent, options may only be exercised by the original grantee during their lifetime. 2. Optionees are not stockholders. Until an option is exercised and shares are issued, the optionee has no voting rights, no dividend rights, and no rights to information available to stockholders.

Provide a high-level summary of federal tax treatment for each Award type, and repeat the disclaimer that this is not tax advice.

NSO exercise: The spread between exercise price and FMV at exercise is ordinary income, subject to income tax and (for employees) payroll tax withholding. The company gets a corresponding deduction.

ISO exercise: No regular federal income tax at exercise if holding-period rules are met — but the spread is a preference item for AMT and may create tax liability in the year of exercise. If the shares are held two years from grant and one year from exercise, gain on sale is long-term capital gain. If sold earlier (a "disqualifying disposition"), the spread at exercise becomes ordinary income.

RSAs: Taxed as ordinary income as they vest — unless an 83(b) election is filed within 30 days of the grant date, in which case the employee pays income tax on the FMV at grant and future appreciation is capital gain.

RSUs: Taxed as ordinary income at settlement (typically vesting), with withholding at that time.

The single most valuable sentence in the entire Information Statement is: "You should consult your own tax advisor before exercising any option or making an 83(b) election." Put it in bold. Employees who follow it save real money. Employees who don't sometimes become former employees with a grievance.

State that the Board may amend or terminate the Plan at any time, but no amendment may materially and adversely affect outstanding Awards without the holder's consent. Certain amendments (increases to the share pool, changes to eligibility) require stockholder approval.

If the Plan provides for acceleration on a change of control — single-trigger or double-trigger — describe it in one clear sentence. If it does not, say so. Ambiguity here poisons M&A conversations.

Copy-pasting from another company's plan without checking that the mechanics match your actual Plan document.

Forgetting to update the FMV language after a priced round or new 409A.

Silence on the 90-day ISO conversion rule in plans with extended exercise windows.

Not delivering the Information Statement at the time of grant. Under Rule 701, disclosure timing matters. Ask counsel about the thresholds that trigger enhanced disclosure.

Treating it as a legal document only. Employees read it. Write it clearly.

Every option grant is a moment where an employee places long-term trust in the company. The Information Statement is where that trust is either earned or quietly eroded. Write it clearly, keep it consistent with the Plan and Option Agreements, update it when the 409A changes, and encourage employees to read it with their own tax advisor. Done well, it turns a legal formality into one of the most transparent parts of your compensation program — and one of the strongest signals that your company treats its team like owners.