Salary FYI

Stock Option

Investing

A contract giving an employee the right to buy company shares at a predetermined price (strike price) within a specified period, potentially profiting if the stock price rises.

## Stock Option

Stock options grant the right — but not the obligation — to purchase company shares at a fixed price (the strike or exercise price). They are a core component of equity compensation, especially at startups and pre-IPO companies.

### Types

| Type | Tax Treatment | Eligibility |
|------|---------------|-------------|
| ISO (Incentive Stock Option) | Favorable capital gains if holding requirements met | Employees only |
| NSO (Non-Qualified Stock Option) | Ordinary income on spread at exercise | Employees, contractors, advisors |

### Example

You receive 10,000 options with a $10 strike price. Company stock reaches $50.
- Exercise cost: 10,000 x $10 = $100,000
- Market value: 10,000 x $50 = $500,000
- Pre-tax gain (spread): $400,000

### Key Considerations

- **Expiration**: Typically 10 years from grant, 90 days after leaving.
- **AMT risk (ISOs)**: Exercising ISOs can trigger Alternative Minimum Tax on the spread.
- **409A valuation**: Strike price must equal fair market value at grant (private companies use 409A appraisals).
- **Early exercise**: Some companies allow exercising before vesting (Section 83(b) election).