Equity grant mechanics. How to grant employee options.
Granting equity to employees involves several moving parts: an option plan adopted by the board, individual grant documentation, board approval of each grant, exercise price (set by 409A), vesting schedule, and various tax considerations. This guide walks through the mechanics.
Start here.
Board-adopted plan defining total option pool, terms, eligibility.
Granted via Option Agreement: number, type, strike, vesting.
Each grant requires board action (consent or meeting).
Must be at or above 409A FMV.
Standard 4 years with 1-year cliff.
The full picture.
Adopt a Stock Option Plan
Board adopts a plan (e.g., 2026 Stock Plan). Defines: pool size (e.g., 2,000,000 shares), types of grants allowed (ISO, NSO), eligibility (employees, contractors, advisors), terms (exercise prices set per 409A, vesting schedules, expiration, etc.). Shareholders typically approve at the next shareholder meeting.
Individual Grant Documentation
Each grant uses an Option Agreement specifying: optionee, number of shares, type (ISO or NSO), exercise price (= 409A FMV at grant), vesting schedule, expiration date (typically 10 years from grant), termination provisions.
Board Approval
Each grant requires board action. Common: board adopts a written consent listing all grants for a period (e.g., monthly). Documented in board records.
Exercise Price (Strike)
For ISOs: must be at or above FMV at grant per 409A. For NSOs: same general rule, plus 409A penalties at the option holder level if below FMV.
Vesting
Standard 4 years with 1-year cliff. Variations: 5-year vesting at later-stage companies; immediate vesting for advisors; performance-based vesting for executives.
ISO vs NSO
ISO (Incentive Stock Option): favorable tax treatment for employees. Limited to $100k vesting per year per person. Only for employees. NSO (Non-Qualified Stock Option): no special tax. Available to non-employees. Both subject to 409A.
Tax Forms
Grant: no tax. Exercise: ISO no immediate tax (AMT consideration); NSO ordinary income on spread. Sale: ISO qualifying disposition = capital gain; NSO = capital gain on appreciation post-exercise.
Termination Provisions
Standard: vested options have 90 days post-termination to exercise. Unvested options forfeited. Some plans extend exercise window for good-leaver scenarios.
Common Mistakes
Granting options without an adopted plan. Below-FMV strike (triggers 409A penalties). Missing board approval. Granting ISOs to non-employees (invalid). Allowing exercise post-90-days without plan provision.
Common questions.
Do I need a stock option plan?
Can I grant options to contractors?
What is the typical vesting?
How large should the option pool be?
What happens to options when an employee leaves?
ISO vs NSO?
Do I need a 409A?
Cost to set up option plan?
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