What are stock options?
Stock options are contractual rights to purchase a specified number of shares of a company’s stock at a predetermined price (the exercise price or strike price) during a defined time window. The two main types in startup compensation are incentive stock options (ISOs) and non-qualified stock options (NSOs), differing in tax treatment under U.S. law.
Stock options are the dominant equity compensation instrument in early-stage U.S. startups because they preserve cash and align team incentives. Key documents include the Equity Incentive Plan approved by the board, the Stock Option Agreement with the recipient, and exercise notices governed by SEC Rule 701 or registration exemptions.