Option Grant

An option grant is the formal board action of approving and issuing stock options to a recipient. It is documented by a board resolution authorizing the grant, a Notice of Grant delivered to the recipient, and a Stock Option Agreement specifying share count, strike price (set by the current 409A valuation), vesting schedule, expiration date, and option type (ISO or NSO). It is the formal transaction that converts an option-pool reserve into an actual employee equity grant, and the documentation must be correct or the grant's tax-favored treatment can be jeopardized.

The standard option grant process:

• Recommendation: management (typically CEO or HR/People) recommends grants to the board for approval, with size based on role, level, and grant guidelines.
• Board approval: the board (or compensation committee) approves grants via board resolution, with the resolution specifying the recipient, share count, strike price, vesting, and option type.
• 409A valuation: the strike price must equal the fair market value of common stock at grant date, set by a current 409A valuation (typically valid for 12 months or until a material event). Granting below FMV creates Section 409A penalty tax issues for the recipient.
• Grant documentation: Notice of Grant delivered to the recipient (summary terms), Stock Option Agreement signed by both parties (full legal terms), and acknowledgment of the Plan documents (the umbrella plan governing all grants).
• Cap table update: the grant is recorded in the cap table (or cap table software like Carta) with all relevant details.
• Recipient action: ISOs require no recipient action at grant; NSOs are similarly passive at grant. Action is required at exercise (and 83(b) filing if early-exercising unvested options).

The critical documentation pieces: the board resolution must reference the grant date (the date the board approved); the Notice of Grant and Stock Option Agreement must match the resolution; the strike price must equal the current 409A FMV; the vesting schedule must be specified clearly. Errors in any of these (wrong strike price, missing resolution, mismatched documents) can create 409A compliance issues, lost ISO status, or future disputes.

Grant-size guidelines: standard grant-size guidelines tie grants to role and level. Examples for early-stage venture-backed companies: first engineer 1-3% of fully diluted, VP-level non-founder hire 1-2%, director-level 0.25-1%, senior individual contributor 0.1-0.5%, regular IC 0.05-0.2%. Numbers vary significantly by company stage, role criticality, and market dynamics. Refresh grants: standard practice at most venture-backed companies is annual refresh grants (additional grants on top of original) for retained employees, typically 25-50% of the original new-hire grant size, to maintain ongoing equity incentive as the original grant vests.

What founders get wrong: Granting options informally (verbal commitments, handshake equity, "we'll formalize it later") instead of running the proper grant process. The handshake grant doesn't actually exist legally; the formalization months later can create 409A issues if the strike price doesn't reflect the FMV when the promise was made. The right discipline: every equity promise gets formalized within 30 days of the verbal commitment, with proper board approval, correct strike price (current 409A), and signed documentation. Cap-table software makes this fast. The cost of doing it right is minimal; the cost of doing it wrong is hard to clean up.

Related: Stock Option · Option Pool · Option Strike Price · 409A Valuation · Cap Table

FAQ

What is an option grant?
The formal action by the board of directors (or compensation committee) of approving and issuing stock options to a recipient. Documented by a board resolution, a Notice of Grant, and a Stock Option Agreement specifying share count, strike price, vesting, expiration, and option type.

What documentation does an option grant require?
Board resolution authorizing the grant, Notice of Grant delivered to the recipient (summary terms), Stock Option Agreement signed by both parties (full legal terms), acknowledgment of the Plan documents, and cap-table update. The board resolution must reference the grant date; documents must be internally consistent; strike price must equal current 409A FMV.

How big should an option grant be?
Depends heavily on company stage, role, and level. Rough early-stage venture-backed guidelines: first engineer 1-3% fully diluted, VP-level 1-2%, director-level 0.25-1%, senior IC 0.1-0.5%, regular IC 0.05-0.2%. Use stage-appropriate market data (Carta benchmarks, Option Impact, Pave) rather than guessing.