Issuing stock options: the plan, the pool, the board and the grant
By Corply · Updated
An option grant is four documents deep: a plan the stockholders approved, a pool of reserved shares, a board approval at a defensible price, and the grant itself. Skip one and the option may not be what you promised.
1. What an option is, and what it is not
A stock option is the right to buy a set number of shares at a fixed price, the exercise price, for a set period. It is not stock. The holder owns nothing until they exercise and pay. That makes options different from the restricted stock founders usually buy at formation, which they own from day one subject to vesting.
Options are how most startups share ownership with employees, advisors and contractors after formation. Because the exercise price is set at the stock's value on the grant date, the holder benefits only if the company's value grows.
2. Adopt a plan and size the pool
The equity incentive plan
Options are granted under an equity incentive plan the board adopts. The plan sets the rules: who can receive awards, the maximum term, what happens when someone leaves, and how many shares are reserved. To grant incentive stock options, stockholders must approve the plan within 12 months before or after the board adopts it.
The option pool
The pool is the number of shares the plan reserves for future awards. Seed-stage companies commonly reserve somewhere around 10% to 20% of fully diluted shares. That is an industry norm, not a rule; size it to the hires you plan before the next round. Investors in a priced round often ask for the pool to be topped up before their money comes in, which dilutes existing holders rather than them.
Make sure the certificate of incorporation authorizes enough shares for the pool. If it does not, the charter needs amending before the plan can reserve them.
3. ISOs and NSOs
| Incentive stock option (ISO) | Nonqualified stock option (NSO) | |
|---|---|---|
| Who can receive it | Employees only | Employees, advisors, contractors, directors |
| Tax at exercise | No regular income tax, but the spread can trigger alternative minimum tax | Ordinary income on the spread between value and exercise price |
| Annual limit | $100,000 of stock first becoming exercisable per year, by exercise price; the excess is treated as NSOs | None |
| After leaving | Must be exercised within 3 months of employment ending to keep ISO treatment | Whatever the plan and grant allow |
The holder's tax outcome depends on their own circumstances. Point employees to the option exercise guide and to their own tax advisor rather than advising them yourself.
4. Approving and documenting each grant
- Get a current valuation. The exercise price must be at least fair market value on the grant date. A 409A valuation supports that number.
- The board approves the grant. A board consent names the recipient, the number of shares, the exercise price, the vesting schedule and the valuation relied on. Grants are often batched at regular board meetings.
- Sign the grant documents. The recipient receives a grant notice and option agreement under the plan.
- Update the cap table. The grant reduces the available pool and appears as an outstanding option.
- Check the securities exemption. Compensatory grants usually rely on Rule 701, and some states, including California, have their own notice requirements.
Vesting for employees commonly runs four years with a one-year cliff, matching the founder vesting most startups use. Some plans also allow early exercise of unvested options, in which case the holder may need to consider an 83(b) election within 30 days.
5. How Corply fits in
Ask Corply: “Show my cap table fully diluted with a 15% option pool, and what the pool does to the founders' share.”
Corply's cap table shows the pool alongside issued stock and SAFEs, fully diluted, so you can see what a pool of a given size costs before anyone approves it. Corply keeps the board consents, valuation reports and signed agreements behind each ownership change in one record.
The plan document and the decision to adopt it, ISO eligibility, and state securities notices belong with your counsel. Corply is not a law firm.
6. Common questions
Can I promise options in an offer letter before the board approves them?
You can describe a recommended grant, but the option exists only once the board approves it under the plan. Say in the offer that the grant is subject to board approval and priced at fair market value on the grant date.
Do advisors get ISOs?
No. ISOs are only for employees. Advisors, contractors and non-employee directors receive NSOs or another award type.
How big should the option pool be?
Commonly around 10% to 20% of fully diluted shares at seed, sized to planned hires. Treat that range as a norm, not a requirement.
What happens to unvested options when someone leaves?
They usually end. Vested options can be exercised for the period the plan and grant allow, often 90 days for employees, after which they expire.
This page is general education, not legal or tax advice, and reading it does not create an attorney-client relationship. Corply is operated by 0Lumen Labs Corp., is not a law firm, and routes questions that need individualized judgment to licensed professionals. Rules and fees change, so verify current requirements with the relevant state, the IRS, or your counsel.