Options are a large part of how startups compete for talent, particularly when they cannot match the salaries offered by banks or large technology companies. They can be worth a great deal, but they can also turn out to be worth nothing, and many employees only find out which when they leave or when the company is sold.
Whether you are a founder explaining an offer or an employee considering one, you need the same two documents, which are the option grant and the plan that governs it. Together they decide when the option is earned and what happens if the employee leaves or the company is sold, so they should be read before the offer is accepted, while any difference between the offer letter and the formal terms can still be corrected.
What you are actually receiving
An option is a right to buy a set number of shares at a fixed price, known as the exercise or strike price, once certain conditions are met. It is different from receiving shares straight away, and it is also different from phantom equity, which is usually a promise of a cash payment linked to the company's value without any shareholding.
It is worth checking which company is granting the option. Many Nigerian startups employ their staff through the Nigerian company while the options are issued by a Delaware or UK parent, and that affects both the tax treatment and how a sale would work.
If the offer describes the award as a percentage, ask for the number of options and the date and share count used to calculate it. The number of options normally stays the same while later funding rounds increase the total number of shares, so the percentage the options represent will fall over time, as I show in how a funding round changes your ownership.
The offer letter should also be compared with the formal grant. If the number of options or the conditions differ, the difference should be resolved and corrected documents issued, so that the employee and the company both hold the same signed version.
How vesting works for you
Vesting decides when the option is earned. A common schedule runs for four years with a one‑year cliff, which means nothing vests during the first year, a quarter vests at the twelve‑month mark, and the rest vests monthly or quarterly after that. You should check the actual start date and whether you receive credit for any time worked before the grant.
The plan should explain what happens to vesting during parental leave or another long absence. Where vesting depends on milestones, it should say who decides whether a milestone has been met and how that decision can be challenged.
Earning an option and being able to exercise it are separate questions. Some plans allow early exercise, with the unvested shares remaining subject to restrictions, while others only allow exercise when the company is sold, so it is important to know when you will have to make a decision and pay money.
What exercise costs
The cost of exercise is the number of options multiplied by the exercise price, but tax also needs to be considered. Depending on the country and the plan, exercising can create a tax charge on the difference between the exercise price and the value of the shares, even though the shares cannot yet be sold. Some plans allow cashless or net exercise, where some shares are sold or withheld to cover the cost, but only where the documents and the transaction permit it.
If you have worked in more than one country during the vesting period, tax may arise in each of them, so advice should be based on your actual dates and places of work as well as on the grant documents.
After exercise, the company should issue the shares and provide a share certificate or other evidence of the shareholding. That confirmation should be kept with the payment record and the exercise notice.
Read the leaving terms before you need them
It is worth finding out early when vesting stops if you leave, and whether a notice period or garden leave counts towards vesting. You should then find the deadline for exercising vested options. A 90‑day window is common, and I think it places real pressure on someone leaving without another job, who has to decide whether to use personal savings on shares they may never be able to sell.
Good leaver and bad leaver terms can affect both vested options and any shares already acquired through exercise. The plan should explain which events fall into each category and what price applies, as well as the process the company must follow before treating someone as a bad leaver.
If the holder dies or becomes incapacitated, the plan should say who can act on their behalf and how long they have, and any beneficiary details should be kept up to date. I discuss similar questions for founders in working through a founder's departure, although each employee's own plan is what governs their options.
A sale and a shutdown
On a sale, options may be taken over by the buyer, replaced with new awards, paid out in cash or cancelled, depending on the plan and the terms of the deal. Single‑trigger acceleration vests options on the sale itself, while double‑trigger acceleration requires both the sale and a second event, usually losing your job within a set period afterwards.
Sale proceeds are paid first to creditors and then to investors with liquidation preferences, and the ordinary shares that most employee options convert into receive whatever remains. The waterfall in the sale documents shows that amount, and from there you can work out what your options are worth after the exercise price and tax.
If the exercise price is higher than the value of each share, the option has no exercise value at that point. In a shutdown, ordinary shareholders often receive nothing, so it is sensible to ask for the figures and the relevant plan terms before paying to exercise.
Shares in a private company usually come with transfer restrictions, so even after exercise you may only be able to sell when the company allows it or when the company is sold. Keeping the grant, the plan, vesting statements and exercise records together makes it much easier to work from the real figures when an opportunity to sell comes up.
This article is general information and not legal advice. For guidance on your specific circumstances, speak with us directly.