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Stock options = the right (but not the obligation) to buy company stock at a set price
Stock options are financial contracts that give the holder the right (but not the obligation) to buy or sell a company’s stock at a predetermined price, called the strike price, within a set time frame (the expiration date). Options are derivative securities, meaning their value is derived from the price of the underlying stock.
They can be traded on exchanges, where their price (the premium) is influenced by factors like the current stock price, time until expiration, volatility, and interest rates. Investors use them both for hedging risk and for speculation, though options trading carries complexity and risk.
“Stock options” also refer to a form of employee compensation, often used by startups and growth companies. In this context, stock options allow employees to purchase shares of their company’s stock at a fixed price, known as the strike price, usually for a set period of time. This means that if the stock’s market price rises above the strike price, employees can buy at the lower price and benefit from the difference.
The exercise price never changes after the grant date; it’s locked in. That’s why stock options can become valuable if the company grows, but also why they have an expiration date if the market price doesn’t go up. This article focuses on this type of stock options.
Here’s how it works in practice:
The exercise price never changes after the grant—it’s locked in. That’s why stock options can become valuable if the company grows, but also why they have an expiration date if the market price doesn’t go up.
Stock options are often included as part of a compensation package, alongside salary and bonuses. Instead of only paying employees in cash, companies use options to share potential future value.
Employers grant stock options to align employees' and the company's goals. When employees hold options, they have an incentive to help the company grow and increase its value, because a higher stock price also makes their options more valuable. This link between individual effort and company performance is why stock options are a common tool for startups and growing firms.
Not all stock options are the same. The type of option you receive can affect how it’s taxed, how flexible it is, and how much it may be worth to you. Here are the main categories:
At a global level, stock option plans for employees are well known as ESOP programs (Employee Stock Option Plans). In the United States, most employees are offered either ISOs or NSOs.
Building a culture of ownership starts with understanding the different ways employees can receive equity. In Europe, the most common structures are Employee Stock Option Plans and Phantom Share plans.
Outside the US, stock option rules look different. Many countries have their own employee share schemes designed to encourage participation and sometimes reduce taxes:
United Kingdom
France
Germany
Netherlands
Ireland
If you’re based in Romania or Bulgaria, the rules may differ significantly from those in the countries listed above. To help you navigate the legal and financial details of setting up an ESOP locally, we host dedicated webinars with top legal and financial experts who explain everything in practical terms.
You can watch the webinar in Romanian or watch the webinar in Bulgarian, both held in the local language, so the guidance is easy to follow and directly relevant to your market.
The Lifecycle of an ESOP
If you’ve ever been offered stock options as part of your job, you know they can sound exciting, but also a little confusing. Let’s break it down step by step so it actually makes sense.
This is when your company offers you the stock options.
Think of it like a promise: “We’re giving you the right to buy shares of our company at a set price (called the strike price).” At this stage, you don’t actually own anything yet; you just have the option.
You don’t get all your options right away. They vest, or become available, over time.
A vesting schedule is the timeline that determines when you earn the right to your stock options. Instead of receiving all your options at once, companies spread them out over time to encourage employees to stay longer.
Most companies don’t let you exercise all your options right away; they want to keep you around. A typical schedule might be four years with a one-year “cliff,” meaning nothing is yours until you’ve been there a year, and then 25% vests. After that, the rest is vested gradually on a monthly or quarterly basis.
Once your options vest, you don’t automatically own the stock. You’ve simply earned the right to buy it at the strike price. To actually become a shareholder, you need to exercise.
That just means buying the shares at your strike price. For example, if your strike price is $5 per share and the current market value is $20, you can buy at $5 and instantly own stock worth more.
Exercising costs real money up front, and depending on the type of options you have, it may also trigger taxes. This surprises many people who assume “vesting” means the stock is automatically theirs. In reality, vesting gives you the choice, but you still have to decide whether and when to buy.
Of course, exercising requires real money, and depending on the type of options, you might owe taxes, too. For employees joining startups, this is especially important: sometimes the strike price is low in the early days, making it cheaper to exercise early.
After you exercise, you hold the number of shares you were vested.
Now, you can choose to sell them (if there’s a market, such as after an IPO) or hold on and hope the price increases. Your gain is basically the difference between the market price and what you paid.
Long-term capital gains are the profits you make when you sell shares you’ve held for more than a minimum holding period, usually one year (rules vary by country). These gains are often taxed at lower rates than regular income.
Stock options are granted to employees, vest over time, and can then be exercised and sold. This gives employees a way to build ownership in the company as they continue working there.
Some companies are already putting this into practice with SeedBlink:
These examples show how stock option plans can be managed more efficiently and used to support both company and employee goals.
This is where things get tricky.
Leaving a company is where the fine print of stock options really matters. Here’s what typically happens:
Another important consideration is that if the company remains private, selling your shares may not be as straightforward. In many cases, it’s only possible through a secondary market, or sometimes not at all, until the company undergoes a liquidity event, such as an IPO or acquisition. Always check with your company for the specific terms and conditions that apply, so you’re not caught off guard.
Private company valuations are not set by open markets. The “fair market value” used for your strike price and taxes might not reflect what the shares will actually sell for later. You could pay taxes on a paper gain that never materializes.
Additionally, early-stage companies usually have higher volatility than mature public companies, because their valuations can change quickly based on funding rounds, growth metrics, or market shifts.
Companies can adjust their equity compensation plans over time. They might issue new options at different strike prices or modify the structure of future grants. These changes can affect the value of your existing options, even if they don’t directly alter your contract.
In Europe, stock option taxation varies a lot between countries, but there are some common themes. In most cases, exercising your options creates a tax event, even if you don’t sell the shares. The taxable amount is usually the difference between the strike price (what you pay) and the fair market value (what the shares are worth on that day). This is often taxed as employment income, which means higher rates compared to capital gains.
Later, if you sell the shares at a profit, you may also face capital gains tax. In some countries, this creates “double taxation” because you pay once at exercise and again at sale. A few countries have special schemes (for example, the UK’s EMI options or France’s BSPCE) that reduce the tax obligation, but these are exceptions, not the norm.
If the company raises money at a lower valuation than before (a “down round”), the value of your options can shrink. Additionally, when new shares are issued to investors, your ownership percentage decreases; this is known as dilution. Even if the company grows, dilution means your share of the company may not be as large as you expected.
Dilution is especially important because when a company raises new funding and issues additional shares, the percentage of ownership you hold decreases. Even if the company’s overall value increases, your individual slice of ownership may become smaller.
To understand exactly how this works in practice, you can use SeedBlink’s Equity Dilution Calculator to see how new investments change your ownership stake.
Stock options aren’t guaranteed income, but they can provide unique advantages that salary and bonuses alone don’t offer. Here are some of the main benefits to keep in mind:
Compensation isn’t just about the number on your paycheck. It often comes as a mix of salary, cash bonuses, and sometimes stock options.
Each element works differently: salary provides financial security, bonuses reward short-term performance, and stock options offer a potential long-term payoff if the company experiences growth.
Salary
Salary is the foundation of compensation. It’s fixed, predictable, and guaranteed as long as you’re employed. A constant paycheck meets immediate needs like rent, bills, and savings, but it usually grows slowly over time. The main disadvantage is that, regardless of how well the company performs, your income doesn’t automatically increase.
Cash bonuses
Bonuses are extra payments, often tied to individual or company performance. They can be motivating and provide a noticeable boost when paid, but they aren’t guaranteed and depend on company results. Bonuses are taxed as regular income, just like salary, so while they help in the short term, they don’t create long-term ownership or wealth if the company’s value grows.
Stock options
Stock options are different: they don’t give you immediate money but instead the right to buy company shares in the future at a fixed price. If the company’s value rises, the upside can be significant. However, options come with risks. They also require patience, since exercising and selling often happen years after the grant.
Restricted Stock Units (RSUs) are another common form of equity compensation. Unlike stock options, RSUs don’t require employees to buy shares at a set price. Instead, the company grants shares outright once they vest, giving employees a guaranteed value at that time.
How do companies use them all together?
Most companies combine these elements. Salary provides stability, bonuses reward short-term results, and stock options tie your success to the company’s long-term performance. Startups, in particular, lean more heavily on options because they often can’t match the cash salaries of larger firms, but they can offer growth potential if the company takes off.
Not necessarily. Stock options can be valuable if the company grows, but they carry risks. If the share price never rises above your strike price, your options may be worthless.
No. The value of options depends on the company’s share price. If the price stays below your strike price, the options have no value.
There isn’t one right answer. The decision depends on your personal finances, the company’s outlook, and tax considerations. Some employees wait until there’s a liquidity event (IPO or acquisition). Others exercise earlier to start the holding period for capital gains tax or to lock in a lower strike price. It’s often helpful to get advice from a financial or tax professional before making the decision.
In private companies, stock options may be illiquid for many years. Without a sale or listing, you may not have a way to sell your shares, even after exercising. Some companies offer secondary sales or buybacks, but these are not guaranteed.
No. Options themselves are not transferable. You need to exercise them first to convert them into shares. Then, whether you can sell depends on whether the company is private or public and whether any restrictions (like lock-ups) apply.
> Guide to implementing an Employee Stock Option Plan (ESOPs).
> When to launch an ESOP: Timing it right for maximum impact in your startup’s growth.
SeedBlink S.A. is registered in the Register of the Romanian Financial Supervisory Authority (ASF), under number PJR28FSFPR/400001, as of 03.11.2022 with an EU passport as per European Securities and Market Authority (ESMA) register of crowdfunding services providers.
