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The stock options glossary: what you need to know before creating or entering an ESOPThe stock options glossary: what you need to know before creating or entering an ESOPThe stock options glossary: what you need to know before creating or entering an ESOP

The stock options glossary: what you need to know before creating or entering an ESOP

Here are some quick definitions of words and expressions you might see when talking about stock options and ESOPs, such as strike price, cliff, and vesting

You might be a founder setting up your startup's Employee Stock Ownership Plan (ESOP). Or you might be an employee looking to know more about the stock options grant that was just offered to you. Either way, knowing the most common words and expressions thrown around in this universe is fundamental.

Become more knowledgeable about stock options and read contracts like a children's book with the glossary below. It's time to get nerdy πŸ€“

Stock options and stock options grant πŸ’°

You can think of stock options as an invitation to buy shares of a company you work for. A stock options grant offers an employee the opportunity to do so, following the company's terms and conditions for how many shares you're allowed to purchase, how long you need to wait before you can start buying them, and how much you'd be paying.

ESOP 🍰

ESOP stands for Employee Stock Ownership Plan, and it is an employee incentive plan often used to attract and retain top talent – think of it as the ultimate employee benefit. The ESOP sets aside a number of shares of the company and establishes the terms and conditions for offering employees an opportunity to buy company stock at a set price.

SOP 🍰

A SOP is a Stock Option Plan, the same as an ESOP.

Share plan 🍰

A share plan is the same as an ESOP and an SOP. I know, we're redundant.

Equity pool/option pool 🏊

Equity pool and option pool mean the same thing: they're the number of shares the company has set aside only for the ESOP.

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ISO πŸ“ˆ

An ISO is an incentive stock option, a US-specific type of stock option grant only applicable to employees who are US residents. It offers taxation benefits.

NSO πŸ“ˆ

A NSO is a non-qualified stock option, meaning it does not qualify for the IRS's incentive taxation treatment. It is offered to international employees.

Strike price πŸ’΅

The strike price is how much each individual share will cost when exercising a stock option grant. It's the price per share set on the stock options offer.

Vesting πŸ†

Vesting is the process of earning the right to purchase shares offered in an option grant. It can be time-based or milestone-based.

Vesting schedule πŸ“†

A vesting schedule is the timeline for when an employee will accrue rights to purchase shares, i.e. over the course of how many years.

Milestone-based vesting πŸ†

A milestone-based vesting is when earning the right to purchase shares in an option grant is tied to an employee's specific performance milestones.

Cliff πŸ“†

A cliff is the gap between when a stock option grant is offered and when an employee will first start vesting their shares. That's a standard practice to safeguard companies.

409a valuation πŸ’΅

A 409a valuation is an independent appraisal of a private company's fair market value (FMV).

Fair Market Value (FMV) πŸ’΅

The Fair Market Value (FMV) is the price a share would sell for in a public market. It's often used as a north star to determine strike prices in option grants.

Exercise πŸ’Έ

An exercise is the act of buying the shares offered in an option grant.

Spread πŸ’΅

A spread is the difference between the strike price and the FMV. It's a way to calculate profit/losses in a stock option exercise.

Post-termination exercise period ⏳

The post-termination exercise period is the window of opportunity to purchase shares after an employee has left the company, which is dependent on whether the termination was voluntary or involuntary.

Voluntary termination 🚫

A voluntary termination results from an employee's decision to leave the company of their own volition.

Involuntary termination 🚫

An involuntary termination is a company-initiated dismissal of an employee.

Notice of grant πŸ“

A notice of grant is a written, formal notice establishing that stock options are being offered to an employee.

Notice of exercise πŸ“

A notice of exercise is a written, formal notice of an employee's purchase of shares according to the terms in their option grant.

Repurchase πŸ’΅

Repurchase, also known as corporate repurchase, refers to when a company buys back its shares from existing shareholders.

Liquidity event πŸ€‘

A liquidity event is an action that allows shareholders to cash out on some or all of their investments. A liquidity event can be a merger, acquisition, initial public offering, tender offer, etc.

Merger πŸ€‘

A merger is when two companies combine into a single one.

Acquisition πŸ€‘

An acquisition is when one company buys out the other.

Initial public offering (IPO) πŸ€‘

An initial public offering, or IPO, is when the company starts trading shares in a public stock market.

Tender offer πŸ€‘

A tender offer is when an investor or the company itself offers to purchase shares from existing shareholders in a company.

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Keep learning

The venture-backed startup glossary

‍Stock options 101 for startup employees

How do vesting agreements work?

How to avoid equity dilution

Stay tuned

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