Stock Options
The right to buy company shares at a fixed price (strike price), granted as compensation.
Definition
Stock options give you the right, but not the obligation, to purchase company shares at a predetermined price (the strike price) set at the time of your grant. Options vest over time, usually four years with a one-year cliff. If the company's value increases, you profit by exercising your options at the lower strike price and eventually selling at the higher market price. Options expire if not exercised, typically 10 years from the grant date.
Why it matters
Stock options are the most common form of startup equity compensation. Their value depends on the spread between your strike price and the future exit price. If the company never exits above your strike, they are worthless.
Example
You receive 20,000 options with a $2 strike price. If the company IPOs at $30/share, each option is worth $28 in profit. Total value: $560,000 before taxes. If the company sells for $1.50/share, your options are underwater and worthless.