ContractsCounsel Logo
Home Blog Stock Startup: What Is It? How Does It Work?

Stock Startup: What Is It? How Does It Work?

Jump to Section

Stock At Startups Defined

Startup stock is a form of employee compensation where an employee at a startup is granted stock from the company. Given the high risk of startups, startup stock is often used to lure high caliber employees to join early-stage companies since these employees can benefit in the upside of the stock if the startup becomes a big success.

Startup stock can come in many forms, but we will go over the most popular forms which are stock options and restricted stock. Both can be powerful tools to aligns incentives to give the startup the best chance of succeeding.

Here is an article by Y Combinator on startup stock options.

How Does Startup Stock Work?

If you’ve ever worked in a startup, you understand how challenging, fast paced, and unpredictable things can be. Employees typically where multiple hats and operate under intense pressure with a lot of autonomy. Even worse, salaries at startups are often below market value since capital is a scarce resource.

Because of these factors, employees are often offered equity to offset what they are foregoing by not getting a job at a more established company. Startup equity is typically offered in stock options or restricted stock. Let’s first go over some of the key terms to know.

Key Terms Found In Startup Stock

  • Number of Shares – The number of shares is a term in the agreement that outlines how many units of stock the employee will have the opportunity of earning.
  • Grant Date – The grant date is the day the employer gives the employee the stock options or units.
  • Expiration Date – For options, the expiration date is the day the employee can no longer exercise the options. This is typically long after the grant date and can be up to 10 years.
  • Exercise Price – For options, the exercise price is a fair market rate for the shares being offered to the employee. This is the same price the employee will be able to purchase the shares for in the future.
  • Vesting Schedule – The vesting schedule is the achievement the employee will need to hit in order to earn the shares. The vesting schedule is typically time-based.
  • “One Year Cliff” – A one-year cliff is a common feature in vesting schedules which essentially means the employee needs to stay at the employer in order to earn any shares or options.

Here is another guide on stock options for first time startup employees.

Meet some lawyers on our platform

Tabetha H.

36 projects on CC
CC verified
View Profile

Danny J.

13 projects on CC
CC verified
View Profile

Sarah S.

35 projects on CC
CC verified
View Profile

Ryenne S.

673 projects on CC
CC verified
View Profile

Startups have many forms of employee compensation that involves providing employees with equity. Two popular types of startup sock are incentive stock options and restricted stock units.

Browse some of our startup lawyers here.

Incentive Stock Options

Incentive stock options, also known as ISOs, are a form of employee stock options that startups routinely use to incentive their employees. Some of ISOs key features are their exercise price, vesting schedule, and expiration date. ISOs are also subject to preferential tax treatment, unlike non-qualified stock options.

ISOs allow for an individual employee to buy shares in the future at a pre-set price. In other words, when the ISOs are issued to the employee, they will have an exercise price which is the current fair market value of the shares. If the value of the shares goes up over the employee’s lifetime at the startup, they will be able to purchase these shares at the pre-set price in the future in hope of earning a profit.

Here is a quick example of how ISOs works:

  • John is given 10,000 ISO shares at an exercise price of $1 per share.
  • The vesting schedule for the shares is four years with a one-year cliff.
  • John stays at the startup for 5 years, so his shares are fully vested, and the startup is acquired at a price of $5 per share.
  • John then chooses to exercise his options, which means he purchases the 10,000 shares at $1 per share for a total of $10,000.
  • The shares John receives are worth $5 per share, or $50,000. John has netted a profit of $40,000.

Here is an article on Incentive Stock Options.

Restricted Stock Units

Restricted stock units (RSUs) are another form of compensation routinely used with startups and are typically given to executives. While RSUs have a vesting schedule, similar to ISOs, they do not need to be purchased when they vest. This makes them different than ISOs.

Another way of understanding this is an employee will be granted RSUs on a certain date, and after the RSUs vest, they will be transferred ownership to the employee at this time.

One thing that makes RSUs different is they are regulated by the SEC and fall underneath insider trading regulations. Typically, RSUs are issued to executives that know what is going on at a company.

Here is a quick example of how RSUs work:

  • John is granted 1,000 RSUs when joining a late-stage startup.
  • The RSUs come with a vesting schedule of four years with a one-year cliff.
  • After one year, 25 percent of John’s RSUs have vested so he now owns 250 shares.
  • After four years, John now owns 100 percent of the RSUs, which means he owns 1,000 shares.
  • Notice, John did not need to exercise his shares like he would have with stock options.

Here is an article on Restricted Stock Units.

ContractsCounsel Stock Startup Image

Image via Pexels by Startup Stock Photos

Stock Option Agreements and Restricted Stock Units Agreements

The two types of startup stock we’ve gone over are granted to employees by using a stock options agreement or a restricted stock unit agreement, which are legally binding documents that outline offers to employees and are executed to govern the relationship between the employer, employee, and startup stock. These agreements are typically accompanied by an employment contract , noncompete agreement , and other types of employment contracts .

Here is an example of a Form of Restricted Stock Unit Agreement.

Basics of Exercising Startup Stock Options

Employees that receive stock options will be faced with the choice of exercising them in the future. This is one of the key features of employee stock options. Exercising startup stock options means purchasing the shares at the exercise price that was established in your stock options agreement.

The way an employee benefits from exercising their options is if the current price of the stock is much higher than the fair market value of the price when the options were granted. This means the employee would stand to make a profit by buying the shares. The profit is the difference between the current market value of the shares minus the exercise price multiplied by the number of shares.

Here is an article about when you should exercise your stock options.

Getting Help With Startup Stock

Startup stock, employee stock options, restricted stock and other types of employee compensation can be complicated to understand and negotiate. If you need help, feel free to post a project in our marketplace to work with a lawyer familiar with employee compensation and startups. It is free to post projects and receive bids.

ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.

How ContractsCounsel Works
Hiring a lawyer on ContractsCounsel is easy, transparent and affordable.
1. Post a Free Project
Complete our 4-step process to provide info on what you need done.
2. Get Bids to Review
Receive flat-fee bids from lawyers in our marketplace to compare.
3. Start Your Project
Securely pay to start working with the lawyer you select.

Meet some of our Lawyers

Patrick N. on ContractsCounsel
View Patrick
5.0 (4)
Member Since:
January 18, 2023

Patrick N.

Attorney at Law
Free Consultation
7 Yrs Experience
Licensed in MA
Suffolk University Law School

Before attending law school, I had a prior career in business performance reporting. This experience differentiates me from other attorneys. I can readily read, interpret, and synthesize financial reporting. I also have a passion for legal research and writing.

Jonathan M. on ContractsCounsel
View Jonathan
5.0 (1)
Member Since:
January 19, 2023

Jonathan M.

Free Consultation
Charlotte, NC
14 Yrs Experience
Licensed in NC, SC, VA
Charlotte School of Law

Owner and operator of Meek Law Firm, PC. Meek Law Firm provides comprehensive business law representation, precise and informed representation for real estate transactions in the commercial and residential markets of North and South Carolina and efficient succession and estate planning for business owners and individuals.

David A. on ContractsCounsel
View David
5.0 (1)
Member Since:
January 23, 2023

David A.

Family Lawyer
Free Consultation
42 Yrs Experience
Licensed in FL
University of Florida

Graduated UF Law 1977. 40 years experience in Family Law/Divorce and Prenuptial Agreements. Rated "AV Preeminent" By Martindale Hubble, the oldest lawyer rating firm in the USA. Top 5% of attorneys in Florida as reviewed by Judges and other Lawyers (not client reviews). Personal prompt service and easy to contact--available 24/7. Good negotiator and very personable. My clients are my priority.

Wendy C. on ContractsCounsel
View Wendy
4.9 (33)
Member Since:
January 17, 2023

Wendy C.

Free Consultation
6 Yrs Experience
Licensed in AZ, IA, TX
Arizona Summit Law School

My legal practice is focused on business transactions like general corporate matters, fundraising, technology contract negotiation, blockchain, crypto or token analysis, and others. I hope to be a good asset to you and looking forward to finding out how I can be of help!

David T. on ContractsCounsel
View David
Member Since:
June 15, 2023

David T.

Free Consultation
Ann Arbor
30 Yrs Experience
Licensed in MI

David Trentadue has been practicing law since 1994. He received his Bachelors’ Degrees in History and Political Science from the University of New Orleans and his Juris Doctor, cum laude, from the Thomas M. Cooley Law School. Currently in private practice, his areas of concentration include Estate Planning, Probate and Trust Administration, Real Estate, Business Formations and Corporate Governance. He is licensed in all state and federal courts in Michigan. He is also a Licensed Title Examiner

Charles K. on ContractsCounsel
View Charles
Member Since:
January 23, 2023

Charles K.

Free Consultation
New York, NY USA
41 Yrs Experience
Licensed in NY
University of Illinois Chicago School of Law (John Marshall)

~ Charles Kramer - Technology, Contracts and Intellectual Property Attorney ~ I am a New York corporate and technology attorney. My experience includes: - representing high-tech companies (including software, military, manufacturing and computer game companies) in connection with negotiating and drafting (1) toolkit, enterprise, Saas, PaaS and other complex agreements and licenses with companies around the world; (2) joint-venture, sales, publishing and distribution agreements; and (3) general corporate agreements. - 5 years as General Counsel of a software company (and many more years representing it as outside counsel); - 3 years as an associate in the Wall Street law firm of Lord, Day & Lord (then the oldest law firm in New York City practicing under the same name); and - speaking at conferences on legal issues including at the annual Game Developers Conference and Miller Freeman's Digital Video Conference. I am comfortable working in areas where the technology -- and the related law -- are new. My recent work includes working as a contract attorney (extended on a month-by-month basis) as American counsel for a publicly traded Swiss industrial corporation with responsibility for drafting form contracts for its planned "industrial internet of things" digital services. Accordingly I am comfortable working in a corporate environment using modern collaboration tools. Charles Kramer (917) 512-2721 (voice, voicemail, text)

Joseph M. on ContractsCounsel
View Joseph
Member Since:
January 23, 2023

Joseph M.

Free Consultation
Boston, MA
3 Yrs Experience
Licensed in MA
Massachusetts School of Law

Joe provides premium legal services to both individuals and businesses throughout the Commonwealth. Experience litigating civil and criminal matters, as well as drafting/negotiation transactional issues involving contracts, real estate, business formation, estate planning and more. Prior to entering private law practice, Joe worked for two decades in financial industry including regulatory and compliance for both national and regional banks and investment firms.

Judi P. on ContractsCounsel
View Judi
Member Since:
January 26, 2023

Judi P.

Free Consultation
New Mexico
4 Yrs Experience
Licensed in NM
Arizona Summit Law School

Driven attorney with a knack for alternative dispute resolution, real estate, corporate law, immigration, and basic estate planning, with superb people skills and high emotional intelligence, and for working smart and efficiently, as well as time and financial management skills to deliver excellent legal work and solutions to legal issues. Seasoned with 20+ years of law firm and legal experience (real estate/corporate).

Brittany T. on ContractsCounsel
View Brittany
Member Since:
January 26, 2023

Brittany T.

Free Consultation
10 Yrs Experience
Licensed in GA
Florida Coastal Law School

Brittany is an experienced attorney specializing in transactional and complex contract matters including but not limited to SaaS development and product implementation, technology/data agreements, licensing, and compliance. She has over 7 years of experience providing strategic legal advice to individuals and business clients of all sizes, from start-ups to large corporations. Brittany has a strong understanding of the legal issues related to technology and software and is well-versed in drafting and negotiating contracts ranging from software licenses to data sharing agreements. She is a highly-skilled negotiator and is adept at finding creative solutions to challenging legal issues.

Find the best lawyer for your project

Browse Lawyers Now

Quick, user friendly and one of the better ways I've come across to get ahold of lawyers willing to take new clients.

View Trustpilot Review

Need help with a legal contract?

Post Your Project

Get Free Bids to Compare

Hire Your Lawyer

See All Employment Lawyers
See All Stock Startup: What Is It? How Does It Work? Lawyers

Contracts Counsel was incredibly helpful and easy to use. I submitted a project for a lawyer's help within a day I had received over 6 proposals from qualified lawyers. I submitted a bid that works best for my business and we went forward with the project.

View Trustpilot Review

I never knew how difficult it was to obtain representation or a lawyer, and ContractsCounsel was EXACTLY the type of service I was hoping for when I was in a pinch. Working with their service was efficient, effective and made me feel in control. Thank you so much and should I ever need attorney services down the road, I'll certainly be a repeat customer.

View Trustpilot Review

I got 5 bids within 24h of posting my project. I choose the person who provided the most detailed and relevant intro letter, highlighting their experience relevant to my project. I am very satisfied with the outcome and quality of the two agreements that were produced, they actually far exceed my expectations.

View Trustpilot Review

How It Works

Post Your Project

Get Free Bids to Compare

Hire Your Lawyer

Want to speak to someone?

Get in touch below and we will schedule a time to connect!

Request a call

Find lawyers and attorneys by city