Why stock option matters to a first-time founder
Options let you hire people you cannot yet pay market salaries, but every grant shrinks everyone else’s share once it is exercised. Get the terms wrong and you can face an unhappy team, a messy cap table during due diligence or an avoidable tax bill for the employee. In the UK, a properly set-up EMI scheme can make options far more tax-efficient, so the structure matters as much as the percentage.
Examples of stock option
You hire an engineer and grant an option over 1% of the company, at today’s price, vesting over four years. On day one they own nothing new. After a year, a quarter of that 1% can be bought at the price you wrote down. If they leave before any of it vests, the option does not travel with them. The cap table should show the grant so you are not surprised by it later.
Common misunderstanding
People describe options as a gift of shares, or they get lost in the wider meaning. In a startup hiring context, a stock option or share option normally means a right to buy shares. It is not ownership until the option is exercised and shares are issued or transferred. Calling it equity too early will confuse the person you are hiring and the cap table.
When to use it
Use options when you want a hire to share in a future sale, and you cannot pay the full market salary. Write the percentage, the price, and the vesting before they start. A verbal “you’ll get some options” is not a grant.